### According to Prechter:

…in its broadest sense, then, the Elliott Wave Principle proposes that the same law that shapes living creatures and galaxies is inherent in the spirit and attitudes of men en masse…whether our readers accept or reject this proposition makes no great difference as the empirical evidence is available for study and observation.

Here, Prechter is specifically talking about Fibonacci ratios. He claims (and with a substantial body of evidence to back him up) that just as Elliott Waves themselves develop in numbers that precisely match the Fibonacci sequence, there are a number of other precise relationships based on Fibonacci ratios that occur with shocking regularity. Broadly speaking, these are divided into two camps:

• Retracements

• And Multiples

We’ll take a closer look at both of them in this section.

### Retracements – A Closer Look

Waves tend to retrace in predictable ways. That is to say, we know that progress is uneven. Price never rises (or falls) in a straight line. It goes up or down for a while, and then is interrupted by a move in the opposite direction, which retraces some of the territory previously gained (or lost) by the wave that came before it.

The following are the Fibonacci ratios most commonly seen in retracements:

• 0.382 (38.2%)

• 0.5 (50%)

• 0.618 (61.8%)

As you can see, these choices leave a wide margin of error, so it falls to the analyst to choose carefully and use other analytic tools to make a more informed choice. Here are some helpful guidelines:

### Wave two retracements

Retracements of 61.8 and 50% of Wave twos and Wave B and Wave X are the standard retracement levels.

Trader notes on wave two;

are 61.8% of Wave one. However, from a trader’s point of view, this retracement can be any where from 40 to 80% and this is because of where the Wave two is in the larger degree of the structure, as an example Wave (3) of 3 of 3) of (iii) is a very powerful place in an impulse wave and retracements of Wave two’s will have a shallower retracement. From a trader’s point of view its more important to understand the abc of Wave two the abc will be a 5-3-5 structure, so counting those waves is more important than looking for the 61.8% retracement of wave two.

### Wave four retracements

Retracements for Wave four is 38.2%

Trader notes on wave four;

are 38.2% retracement of Wave three and from a traders point of view this is generally more accurate than the wave two 61.8% retracement, this is in part because of the support of the previous wave four, that is the wave four of one lessor degree. But a wave four brings its own complications as they are normally sideways and complicated, especially if the previous Wave two correction was sharp and simple, also from a trader’s point of view the wave four will be complicated if Wave three has the extended structure.

Prechter notes that Fibonacci ratios have some value where retracements are concerned but tend to be more reliable when dealing with multiples, which is our next topic.

### Multiples – A Closer Look

The first thing we must do, before diving headlong into multiples, is to take a closer look at the difference in the way the ratios are measured between retracements and multiples in impulsive patterns.

Where retracements are concerned (corrective patterns), we take the range in dollars (or cents, or points) and apply the ratio to the value of the range.

Where multiples in impulsive waves are concerned, we can either use the range in dollars/cents/points, or we can use a percentage. Usually, percentage basis (semilog) is used in long term charting but should definitely be considered anytime a move is disproportionately large relative to its history.

The percentage method also applies to Wave 2/Wave 4 relationships, even though they are corrective waves.

Here, we will work only with arithmetic scaling, so you won’t have to make percentage calculations.

As to the multiples themselves, and the use of Fibonacci ratios in them, we’ll be taking a look at impulsive and corrective waves separately.

Here are a pair of handy charts to reference when dealing with impulsive waves:

The first chart below: If wave three is extended then wave five will be 0.618 or 1.0 or 1.618 the length of wave one.

Traders notes: In most cases if wave three is extended the wave one and five will much the same. If the previous wave four as retraced to its previous wave four of one lesser degree then then length of wave one may not be long enough for wave five to make a new high, so taking 61.8% of wave three and adding to the low of wave four can also give you the projected target, you could also take the length of wave four and add 1.618 for the target. But as mentioned earlier its is more important to count the five waves in the 5th wave to refine the target and you could also use the TradingLevels to help understand target better.

In the chart below Wave 3 can also be 1.618 or 2.618 times the length of Wave one. All waves are related with a Fibonacci ratio

Wave five extended

Wave five will be 1.618 of the length of waves one and three combined.

Wave five extended

Wave Ratio

An impulse wave as 1.0 and then broken down into 382 and 618 from wave four

And here are a pair of handy charts to reference when dealing with corrective waves:

The first chart below is typical in single and double Zigzag corrections

Wave (a) and Wave (c) are equal in length, this occurs in Flat corrections

### Expanded Flat corrective pattern ratio

Wave (c) can be 1.618 times the length of Wave (a)

Wave (b) can be 1.236 or 1.382 times the length of wave (a)

## Module #5 Summary

• Retracements can take two forms:

• Sharp Corrections – These are most likely to retrace 0.618 or 0.5 of the previous impulse wave. This is most reliable for Wave 2, Wave B of a larger zigzag, and Wave X in a multiple zigzag

• Sideways Corrections – These are most likely to retrace 0.382 of the previous impulse wave. This is most reliable for Wave 4 of an impulse pattern.

• Impulse Wave Multiples

• When Wave 3 is extended…

• Wave 5 tends to be 0.618, 1.00, or 1.618 times the length of Wave 1, AND Wave 3 will also tend to be either 1.618 or 2.618 times the length of Wave 1. This means all three impulsive waves are related by Fibonacci ratios.

• When Wave 5 is extended…

• The range between the start of Wave 1 and the end of Wave 3 tends to be 0.618 of Wave 5 OR Wave 5 tends to be 1.618 times the range between the start of Wave 1 and the end of Wave 3.

• When neither Wave 1 nor Wave 5 is extended…

• The range between the start of Wave 1 and the end of Wave 4 tends to be 0.618 of the full impulsive pattern, which means Wave 5 is 0.382.

• When Wave 1 is not extended and Wave 5 is extended

• The range between the start of Wave 1 and the end of Wave 4 tends to be 0.382 of the full impulsive pattern, which means Wave 5 is 0.618.

• Corrective Wave Multiples

• In a zigzag

• Wave C is generally 1.00 or 1.618 times the length of Wave A.

• In a double zigzag

• Wave Y is generally 1.00 or 1.618 times the length of Wave W.

• In a regular flat

• Waves A, B, and C are roughly equal.

• In an expanded flat correction

• Wave C is generally 1.618 times the length of Wave A.

• Occasionally Wave C is 2.618 times the length of Wave A.

• Sometimes Wave B is 1.236 or 1.382 times the length of Wave A.

• In an Impulsive Pattern

• Wave 4 tends to be 1.00 or a Fibonacci ratio to Wave 2.

## Conclusion

As this course has demonstrated, gaining proficiency with Elliott Wave Theory and putting it into practice as an analytic tool is no easy task. It requires time and patience to master.

In order to successfully put theory into practice, you’ll need access to data of different timescales, including hourly, daily, and weekly, at a minimum. This differs from the charts used on the self-assessment tests you have taken, and students will likely have to go through an adjustment period to acclimate themselves to working with “live” data.

One of the difficulties you will no doubt encounter is best summed up thus:

…the Wave Principle does not provide certainty about any one market outcome….What the Wave Principle provides is an objective means of assessing the relative probabilities of future paths for the market.

This is a crucial distinction that is too often lost on people new to EWT. In many cases, you’ll find that there are a number of alternative possible wave counts. These can sometimes be eliminated or at least given a lower probability via rigorous application of the rules set forth in this course and can be ranked in order of probability via careful application of the guidelines.

It’s always wise to keep these alternative scenarios in mind and close at hand. That way, if the preferred/dominant/most probable scenario fails to develop, the alternatives can be reassessed.

Obviously, this course is not the end itself, but rather, the end of the beginning. We recommend additional courses of study before using Elliott Wave Theory to make live trades.