Fibonacci Ellipse
Tue, Apr 15Fibonacci ellipses reveal the underlying structure of price movements. They navigate around price patterns, and when a price pattern shifts, the shape of the corresponding ellipse also changes. Various types of ellipses can be identified, including long and short, fat and thin, as well as those that are flat or steep. There are very few price movements in the market that do not conform to the Fibonacci ellipse pattern. Generally, the shape of an ellipse is determined by the ratio of its major axis to its minor axis, and it becomes a Fibonacci ellipse when this ratio aligns with the Fibonacci series.
The advantage of Fibonacci ellipses lies in their ability to provide a comprehensive view of the overall price pattern, regardless of the number of waves or sub-waves present, as long as the price can be encompassed by a Fibonacci ellipse. The process begins at the start of wave A in three-wave patterns, with the width of the ellipse selected so that the beginning and end of wave B are connected between the extreme points of the ellipse's minor axis. As long as the price remains within the ellipse, it is highly probable that it will reach the level indicated by the end of the major axis at the approximate time projected onto the graph's time scale.
Fibonacci ellipses, also referred to as phi-ellipses, are a lesser-known aspect of the broader category of Fibonacci studies in technical analysis. A key distinction between Fibonacci ellipses and standard Fibonacci tools is that the former are utilized to assess overall market trends rather than just levels of support and resistance.
To draw a Fibonacci ellipse, three points on a chart are required: an arbitrary starting point, the first peak before a price level reversal, and a second point representing a subsequent reversal back toward the overall trend direction. Once these three points are established, an ellipse can be inscribed around them. The line that bisects this ellipse along the median serves as an indicator of the median price level for the overall trend, and traders view the point where the median line intersects the outer boundary of the ellipse as a signal of a potential market reversal.
Working with Fibonacci ellipses introduces additional complexities. When three Fibonacci ellipses are drawn consecutively, it is sometimes possible to create a larger Fibonacci ellipse that circumscribes all three. If this occurs, it is considered a strong indicator of an impending trend reversal. Furthermore, the slope of a Fibonacci ellipse is typically interpreted as an indication of the severity of the forthcoming price reversal, enabling traders to make informed decisions.
It is important to note that Fibonacci ellipses can only be generated using computer software, which may limit their usefulness for traders lacking the necessary technical analysis tools.
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