- April 13, 2009
- Posted by: Ramki Ramakrishnan
- Category: Trading Tips

Elliott wave analysis of stock market or forex or commodity market would invariably involve the use of some Fibonacci numbers to arrive at targets for corrections or projections. If you had searched the Internet for some information about the Fibonacci number series, you would have found a lot of material, but few explain it clearly enough. So this post aims to fill some of the gaps.

The series takes on a sequence 1,1,2,3,5,8,13,21,34,55,89,144 and so on to infinity. Observe that as we go to larger numbers, the advance becomes closer in ratio to 1.618. (PHI)

Suppose you place two squares of side 1 unit (say 1 inch) side by side, you get a rectangle whose sides measure 1 by 2. Now imagine you have drawn a diagonal on this rectangle, thereby creating two right-angled triangles on either side of the diagonal. If you remember the old Pythagoras theorem that you learned while at school, you will know that the square on the hypotenuse of a right triangle is equal to the sum of the squares on the two sides! So the diagonal

= square root [(1×1)+((2×2)

=square root [1+4]

=square root [5]

=2.236

Now let us just take the first square (of sides 1 unit each) and draw its diagonal. This diagonal will measure square root of 2 = 1.414

These two ratios, 2.236 and 1.414 are sacred roots. The reciprocals of them are 0.447 and 0.707. You will see a lot of my work is using the ratio 0.707!

Now I have a vague suspicion that some of you are more confused than before reading this article. But don’t despair. There are lots of easy stuff that you will learn as we go forward.

Meanwhile, I wish you good trading!

(Note: In a previous version of this post, I had discussed the Golden Rectangle, but while writing the post had input some incorrect numbers. This was pointed out by a diligent reader F.K. and hence I left it out for sake of clarity)

Dear Sir

I am having some confusion on counting the waves of EUR/ USD i.e if you look at the 1 Minute chart.

on 2012.7.13 at the price the bars started going in uptrend, but unable to tap the Second wave, My Wave counting says the First wave has completed and Second wave is in progress in flat formation.

Kindly advice me whether I am correct or not.

I am using Your Book it is great.

Thanks and regards

K.Rajukumar

Chennai

Hi Rajukumar, Thank you for your comments. Unfortunately I am unable to help because of numerous such requests. Besides you are looking at 1-minute charts! To be profitable, I recommend to use daily charts for most of the time, and use the intraday charts to 60 minutes or max 30 minuts to fine tune entry/exits. The lower down you go in time frame, the greater your scope for errors

Thanks for the response, I will follow your guidance.

Dear Sir,

Your book is a great insight to the technical analysis. I am recommending to everybody I talk with on trading. I have few questions understanding the fibonacci ratios.

While computing Fibinacci quite often on daily charts I come accorss ratios like .80, 0.90 especially in 2nd wave, and ratios of 1.00, 1.12 of wave 1, while computing for 4th wave. Are such ratios normal in a 5 wave sequence? My doubt is, is it good to stick to the charts with such ratios for computing targets for wave 3 and wave5?

Hi Sushil, I am glad you like the book, and am positive your friends would thank you too. Somewhere in the book I have mentioned that with wave analysis, fibonacci ratios take the back seat. First, follow the rules and guidelines for teh waves. Use fibonacci ratios to MEASURE targets provided the waves are compliant to the rules. The numbers you mention are not all fibonacci ratios. Having said that, there is no compulsion for prices to stop exactly at the fibonacci related levels. They are just a tendency, not a requirement.

Thanks a ton for the clarification.

sir if i want to buy your book than from where should i buy your this book in india and if possible will u pleas give me their mobile number.

Hi Kaushal, the book is available only online, fom Amazon.com or infibeam.com in India

thankyou very much sir.

Hi Ramki, I bought your book (the kindle version) on Amazon yesterday and am simply amazed by the content offered. I’ve been trading for a little over a year, and I’ve always been intimidated by the complexity of EW. Well, only until I started reading your book ! You’ve explained the fundamentals of Elliot Wave with such fluidity (and simplicity) – that I’ve already started charting waves. I must say that the most helpful chapter thus far has been “Rules of the game”, which helps the reader in identifying waves correctly. I may have to revisit Fib ratios once or twice again, as I’ve used them in a very different context in the past.

All in all, your book is probably the best (under $10 🙂 investment I’ve made in a while (next to Steve Nison’s candlestick analysis, which had cost me $80 :).

Oh, I do have a question. How do you screen for stocks? I mean is there a method that you apply to pick stocks for trading?

Sincerely, Zaheer

PS: I’ve also started a website called http://www.shortanalytics.com. Do check it out if you have the time.

Helo Zaheer, Thank you for your comments. I pick up anything that interests me at a point in time. Wavetimes is only a place where I share my knowledge of how to use EWP to benefit. So the choice is pretty much random, or driven by news!