close icon

Leonardo Fibonacci and The Golden Ratio

Leonardo Fibonacci (1170-1250) is an Italian mathematician, founder of “the Fibonacci sequence” of numbers, where  each number is the sum of the previous two:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987 etc.

         There are several manifestations of the so called “Golden Ratio”, which can be found through the Fibonacci sequence:

5/8≈0,618;           8/13≈0,618;         13/21≈0,618;       21/34≈0,618; etc.

8/5≈1,618;           13/8≈1,618;         21/13≈1,618;       34/21≈1,618; etc.

13/5≈2,618;         21/8≈2,618;         34/13≈2,618;       55/21≈2,618; etc.

5/13≈0,382;         8/21≈0,382;         13/34≈0,382;       21/55≈0,382; etc.

         The Golden Ratio can be very helpful on the financial markets when we compare one wave to another in a wave pattern. For example if we compare the length of wave 3 to the length of wave 1 in an impulse, or if we measure the depth of the corrective waves 2 and 4 in relation to waves 1 and 3.

Wave 2 and wave B often retrace 61.8% of wave 1 and wave A respectively.

Example:

62

 

Wave 4 often retraces around 38.2% of wave 3. Wave 3 is often 1.618 or 2.618 times the length of wave 1. Examples:

38

However, ratio analysis does not provide firm rules, only some very useful guidelines.



Stay informed with our newsletter

Latest Elliott Wave analysis on different topics delivered to you weekly.

Privacy policy
You may also like:

How to Recognize a Leading Diagonal Pattern

One of the first Elliott Wave patterns we devoted an entire lesson to was the ending diagonal. It is relatively easy to recognize and very important, because it is usually followed by a sudden trend reversal. But if there is an ending diagonal, there must be a leading diagonal, as well, right? Yes, there is…

Read More »

Elliott Wave: The Devil Is In the Details

Probably the strongest argument critics use against the Elliott Wave Principle is that traders could often come up with two or more sometimes equally probable scenarios for the market’s future direction. That is true. In an environment filled with uncertainty, it is not always easy to pick just one single count. In fact, we suggest you…

Read More »

The Mischievous Running Flat Correction

In “Expanding Flat and How to Avoid Its Traps” we examined probably the most common type of flat correction the markets could offer. It is easy to spot and relatively easy to trade. However, if you are constantly expecting the expanding variety, you are not going to be prepared for its exotic, but deceptive cousin…

Read More »

Why Waiting For Confirmation? A Tale Of Greed

Every trader with enough experience in the market usually comes to the conclusion, that he needs a system of rules to go by. Rules, which should not let him abandon his discipline and get emotional while trading. Every trading methodology has one such system, which tells you when to go in and out of the market.…

Read More »

What Is Fundamentally Wrong With Fundamentals?

Can you guess which country has the best-performing global stock market so far in 2015? Germany? Japan? USA? Nope. The Business Insider came up with the “surprising” answer yesterday. It is Russia. Yes, Russia – a country in a state of war, whose currency has been suffering terribly against the US dollar and the euro. If…

Read More »

When Does an Elliott Wave Setup Fail?

As a rule, you should never give up on a trade, if it still has the potential to develop in your favor. But how to determine, if a trade is no longer valid? Fundamental market analysis does not provide such information at all. Conventional technical analysis rarely gives you a concrete level for the protective stop. Only…

Read More »

How to recognize an unreliable support?

“The support level is an area below the current price, which has prevented it from falling further in the past. That is why we would usually expect prices to bounce up from it again, when this support level is reached in the future.” This is the short definition of a support level and how traders…

Read More »

More analyses