I know you wondering now after I said Elliot wave was the greatest market analyzing tool of all time, But why does it need supporting tools to function. Well like any strategy it has its shortcoming here and there, that where you need these supporting strategies. A profitable trader is someone who understands all different analyzing tools and combines them to create one powerful strategy. One of the problems with it is that it doesn’t have a clear plan on where to enter the market. How do u know when to execute a buy or sell in the market? Check below diagram showing Elliot wave in simplified form and I’ll explain.
Looking at the diagram above we see the problem; how do we know that we have reached where they is arrows because those arrows could be anywhere as long as we comply with the with Elliot Wave rules. Understanding these other tools like Fibonacci, candlestick pattern, oscillator indicators or support and resistance will help us pinpoint the exact place where they are a high probability of reversal whether it a support or resistance in the market.
FIBONACCI RETRACEMENT AND EXTENSIONS
Fibonacci ratios are levels in the market where they could be support or resistance. Elliot wavers like I love Fibonacci ratios because of its accuracy in predicting support and resistance levels. As an aspiring future Elliot wavers you must be sure you understand how to use the tool correctly because like any other tool if used wrongly it will give you the wrong outcome.
The mostly used Fibonacci ratios are 23.6%, 38.2%, 50%, 61.8% and 76.6%, sometime even 88% retracement. The level that the price likes to reverse the most is 38.3%, 50%, 61.8 %, so combining your Elliot wave counting properly with the Fibonacci ratios you can get a possible reversal point .Let see an example below in the diagram. Let assume that we have completed all 5 waves for wave 1 and we in 3 correction wave for wave 2. And we want to know where wave 2 might end, from experience wave 2 usually lies between 50% to 76.6% retracement .So once we reached there we start looking at other signal tools like candlestick pattern to be sure that it going to be a reversal in the market.
Wow, amazing the price did actually turn between 61.8% to 76.6% retracement, magic heh? Well, it not magic it just Fibonacci ratios at its best. The important thing looking at the diagram is that when you become experienced you will learn the important Fibonacci ratios for each wave, an example is as I said wave two usually around 50% to 76.6% retracement. Notice that retracement help us in predicting support but how do we predict resistance, well that where the extension comes in.
Now let look at Fibonacci extension, the most used are 100%, 138.2%, 161.8 %. But I have found others to be useful like 261.8% and 423.6% but they rarely happen.
Other tools I use are normal support and resistance, by looking at the charts and see where the price might reverse. I also like trend lines and the most accurate of them all is candlestick patterns. It important as an Elliot wave trader to know all the tools for predicting a reversal in the market and use them to your advantage.