What are the Fibonacci Numbers?
There is not possible to talk about Elliott Waves theory without talking about Fibonacci numbers and these numbers are the center of Elliott Waves Theory.
The project here has the purpose of making you familiar with the most important retracement levels when trading one of the most popular patterns with Elliott Waves: a flat pattern.
Based on the retracement level that is made by the b wave, we can know pretty much what is the value to come for the c wave and if the move is going to be completely retraced or not.
Fibonacci and Elliott Waves Theory?
As always, the 61.8% is key to the whole discussion as the three categories of flat have the minimum retracement being 61.8% of the previous wave a. A flat pattern has three waves labeled a-b-c, with the first two being corrective and the last one, the c wave, impulsive.
Corrective waves can be either simple or complex and a flat can be a simple correction or it can be part of a complex correction. Regardless the bigger picture they are forming, they are always corrective waves and should be labeled with letters.
What is a Flat?
The first move in a flat is always the tricky one as no-one knows what the market is going to form for wave a, so the first question one should ask is weather the wave a is impulsive or corrective. If it is impulsive, then the flat pattern is out of the question as the move it is either an impulsive move in the opposite direction or the beginning of a zigzag.
In other words, wave’s a structure is decisive in interpreting if the market is forming a flat pattern or not. Actually, if wave a is clearly a corrective one (if it is split into equal parts, or if it is channeling), then the only two possibilities market has for the entire move is either a flat or a triangle, as only in a flat or a triangle wave a is a corrective one.
That being said, the next thing to do is to look for the retracement level for the b wave. This one needs to be more than 61.8% in a flat but it can go well beyond that level, even more than 261.8% or more.
Based on the length of the b wave one can forecast the move to follow after the flat pattern is completed. For example, the bigger the b wave, the most likely waves c and a will resemble in both price and time and trading call options after a bearish flat, or call options after a bullish one is a must.
One thing is tricky though as the flat should always be interpreted in relation to where exactly the b wave is ending as that is the most important thing of them all. If the b wave ends with a contracting triangle that acts as a reversal pattern then the spike in wave a is not the end of the triangle (hence not the end of the b wave), so one should be very careful in understanding exactly where the b wave ends.
Types of Flats given by Fibonacci Retracement?
The type of the flat says much about the next move to come as well as if the flat is one that ends with a failure (wave c is smaller than wave a) then the implications are really bullish if the flat corrected to the downside as failures are appearing before a massive move in the opposite direction takes place.
A flat has for the c wave an impulsive move and this can be a classical one, meaning it will have at least one extended wave, but it can also be formed out of corrective waves of a lower degree and in this case it will basically not have an extended wave as it is not mandatory. The thing to look for in a c wave of a flat is a rising or a falling wedge as if that is forming as wave c it means that the flat was a continuation pattern and a powerful and strong move in the opposite direction is about to follow.
Flats can be part of complex corrections as well. If market is forming two flat patterns connected with an x wave, it is being said that a double flat pattern takes place, while a triple flat is forming if three different simple flats are being connecting with two x waves of the same degree. However, note here that the x waves should not retrace more than 61.8% when compared with the flat that formed before.
A clear understanding of corrective waves and their implications offers a competitive advantage as market spend most of the time consolidating and it must be said that flats are the most diversified simple correction in the sense that there are around ten different types of flats one needs to look for in order to correctly interpret markets.