Fibonacci Extensions – Part 1
In the previous article, we looked at what R.N. Elliott referred to as the simple ABC zigzag correction. We discovered that when a correction is complete, we expect the trend to resume. Therefore it is important for us to identify when a correction is complete. In this article we will examine how to make a projection to determine when a simple ABC zigzag correction will terminate.
The most typical projection for the end of wave C is when it is equal to the price range of wave A. Many software packages will provide this functionality under various titles, such as “Wave Extension”, “Fibonacci Projection”, “Alternate Price Projection”, etc. We will refer to this technique as a Fibonacci Extension. These tools all perform a similar function. To make a projection, one is required to input three data points. The first two data points are used to input the price range of wave A. The second data point is used to determine where to project the range of wave A from. This third data point will always be equivalent to the end of wave B.
For example, let’s image that we are trying to determine when a bearish ABC correction is going to complete against a bullish trend in the EUR/USD. First we have to measure what we think is the length of wave A. Let’s imagine that it’s a move of 100 points. Next, we need to determine where we think the end of wave B is. If the end of wave B is at 1.4500, we would estimate the end of wave C as 1.4400. Why? In this case once we’ve determined that range of wave A (100 points), we project that range from the end of wave B (1.4500) to give us 1.4400 (1.4500-.0100=1.4400.)
Other technicians may use other Fibonacci ratios when they use the Fibonacci extension tool, however we continue to be of the opinion that the best number to be used with the Fibonacci extension tool is 100%. This percentage continues to be the most effective as outlined by R.N. Elliott. In the next article we will discuss additional information to help us to identify the simple ABC Zig Zag correction.
Ross Beck, DMS, FCSI