Sam Perdue - Secrets of EW & Fibo Ratios Revealed

Secrets of Elliott Waves and Fibonacci Ratios Revealed

By Sam Perdue

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Disclaimer Disclaimer: Trading involves risk of loss. This document is for educational purposes only and should not be construed as trading recommendations. As such, any trading decision you make is your responsibility and you should consider advice from you broker or financial advisor before taking action. Neither Trading Synergy, Inc. or Sam Perdue can be held responsible for your financial losses. Past performance is not indicative of future results. U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED WITHIN THIS SITE, SUPPORT AND TEXTS. OUR COURSE(S), PRODUCTS AND SERVICES SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE USED TO INVEST REAL MONEY. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS SHOULD BE YOUR OWN.

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Table of Contents

INTRODUCTION........................................................................................................................ 4 R.N. ELLIOTT – CREATOR OF THE ELLIOTT WAVE THEORY ............................................... 5 THE ELLIOTT WAVE................................................................................................................. 6 THE BASICS OF THE ELLIOTT WAVE THEORY...................................................................... 7 WHY IS ELLIOTT WAVE THEORY USED BY TRADERS?........................................................ 8 UNDERSTANDING AND INTERPRETING THE WAVES ........................................................... 8 THE HISTORY OF FIBONACCI RATIOS ................................................................................... 9 WHAT'S THE HISTORY OF THIS MYSTERY? .......................................................................... 9 SIGNIFICANCE OF FIBONACCI RATIO IN NATURE................................................................ 9 FIBONACCI RATIOS ................................................................................................................10 USING FIBONACCI RATIOS IN THE STOCK MARKET...........................................................10 THE ELLIOTT WAVE AND FIBONACCI RATIOS.....................................................................11 ELLIOT WAVE – FIBONACCI RATIOS TRADING SIGNALS ...................................................12 YOUR NEXT STEP ...................................................................................................................13 HOW DO I SIGN UP FOR THE FREE NEWSLETTER? ............................................................13

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Introduction In this eBook, I am going to reveal some of Wall Street's most closely guarded secrets. Some people have paid thousands of dollars and in some cases tens of thousands of dollars for this information. And, it is also used in trading software which can cost a trader thousands more. Since this information cost so much to acquire, you may be asking yourself why I'm willing to give it away for free. Well, the answer is quite simple. You see, I have traded these markets long enough to know that no one person or group people can hold enough influence over these markets for extended periods time without going belly up. If you don't believe it, look up the name Nick Leeson on the Internet. Nick Leeson was a trader who tried to force the markets to move in a direction that would make him a lot of money. I won't go into a lot of detail here, but his story can be found in the book "Rogue Trader”. In the end, he managed to bankrupt Barings Bank. And, while this may seem shocking, traders still occasionally make headlines that tell similar stories. It wasn't that long ago that the French trader lost billions trading the Forex markets. Obviously traders that approach the markets with this type of mentality do not recognize the fact that trying to move the markets in this way is much like trying to influence the tides by spitting in the ocean. It just doesn't work. You may also be asking yourself which markets benefit best from the secrets found in this report. After all, there are many different markets such as stocks, commodities, futures and Forex. So, in which of these markets would the secrets perform best? I can appreciate this type of question. With so many different trading systems (and now trading robots as they're called) on the market today, it seems that a trading method has to be tailored to a particular market in order to be effective. What many traders don't realize is that many of these systems are based on linear algebraic equations and logic. In some cases, the input parameters for many of these systems have been optimized to show fantastic historical results which find their way on websites to woo new customers. However, many traders who purchase such systems find that they do not hold up in real-time trading. I think that there are a host of reasons for why this happens. Perhaps, the biggest reason that these types of systems do not hold up in real-time trading is that they are predicated on an assumption that what has happened in the past will happen in the future. This is almost never the case. So if the system is not the answer, what is? In a word, people. People are the common element in all markets. Regardless of whether or not they are exchanging goods for services or money, it is extremely difficult to have a market without the involvement of human beings. So, wouldn't it make sense to predicate your trading decisions on the behavior of the people in the markets? After all, it is the behavior of the people in the markets which move prices higher or lower. So, in getting back to the original question, the secrets that I have to share with you can be applied to virtually any market that has good liquidity. By this, I mean a market which has many buyers and sellers making it easy for you to enter and exit your positions. This would include stocks, futures, Forex and commodities. Trading Synergy, Inc. http://www.tradingsynergy.com Copyright 2009, Trading Synergy Inc. All rights reserved. This document may not be reproduced in part or whole without express written consent.

In the pages that follow, I am going to give some brief detail behind the history of each man before I talk about his contribution to trading. In doing so, I hope that you will understand the natural evolution of these secrets and realize why they are as applicable now as they were so many years ago.

R.N. Elliott – Creator of the Elliott Wave Theory Ralph Nelson Elliott – accountant, finance wizard, planner of countries’ finances, author, brilliant management consultant and a stock market analyst who laid the foundation of technical analysis when he was on his deathbed. That’s R. N. Elliot for you in two lines. But that’s just the teaser, here’s the main course: R. N. Elliot (1871–1948) was a financial mastermind. His financial genius is reflected in his formulation of the Elliot wave theory, which is still being used successfully, 75 years from the time of its inception (1934). Elliot opted for the accounting profession when he was 25 years old, and then for the next 25 years, he occupied top financial positions in railroad companies in Mexico and Central America. During his stints, he rescued many companies from the brink of financial crises, earning himself the reputation of an expert business planner and organizer. In the year 1920, Elliot moved to New York and his reputation and expertise got him a top accountant position in a U.S. Government’s International project. Then in 1924, he was chosen as Chief Accountant of Nicaragua, which was then controlled by U.S. Marines. In early-1925, Elliot applied his expertise and experience in managing and restructuring the finances of Nicaragua – an entire country! In 1926, Elliot moved to Gautemala – he was now General Auditor of Central America’s International railway division. While serving as general auditor, Elliot authored 2 books – “Tea Room and Cafeteria Management” (which was published) and “The Future of Latin America”. Around 1926–1927, Elliot decided to return to America to set up his own management consulting practice. This was also the time when tragedy reared its ugly head. He began suffering from the symptoms of an alimentary canal illness, which he had picked up from his Central American stint. His reputation was on the rise – his book was selling well, his background and references were the talk of the town, and he was an always-in-demand speaker, and his practice was booming. In the best of times came the worst of news – Elliot was diagnosed with pernicious anemia, a debilitating medical condition, and became bedridden at a relatively young age of 58. Elliot skirted death several times in the next 5 years. He was a thinking man and if he was to remain at home for the rest of his life, he had to do something to occupy his mind. He began studying the stock market’s behavior for the past 75 years. He researched all indices across this period, studying their weekly, monthly, daily and hourly chart patterns. He was a man on a mission. It was in May 1934 that Elliot concluded from his research that market indices and stock prices move in cyclic wave patterns, which are comprised of a period of the dominating market trend (upward in bullish market and downward in bearish market) followed by a reactive phase with price movement against the main trend. Elliot had painstakingly discovered the nature of market Trading Synergy, Inc. http://www.tradingsynergy.com Copyright 2009, Trading Synergy Inc. All rights reserved. This document may not be reproduced in part or whole without express written consent.

movements and the psychology behind them. His theory has been proven right in practice, time and again! In November 1934, Elliot presented his theory to Charles J. Collins, a reputed member of the financial community. Apart from exchanging telegrams, nothing much happened between the two until 1935 – the year in which the Dow index was in a bear grip and was falling to pieces. Everyone was bearish and it seemed like the end of the financial world. On 13 March 1935, when the Dow had closed at about 27 points, Collins received a telegram from Elliot that said the market had made its final bottom. Elliot was proven right, as the Dow began climbing up relentlessly thereafter. Collins, impressed by Elliot’s expertise, agreed to collaborate with him on a book – “The Wave principle”, which was published in 1938. It was a path-breaking, bestselling book that awed the financial world. In the same year, Elliot moved into a hotel in Brooklyn, which was a stone’s throw away from Manhattan’s financial hub. In 1939, Elliot was contracted by the magazine Financial World to write a series of articles around his Wave theory. These articles further cemented Elliot’s rocksolid reputation with investors and fund managers. By early 1940, Elliot had firmly established his theory that human emotions and actions were based on a natural progression method. He reconciled human behavior with the “golden ratio”, also known as the Fibonacci ratio. Elliot passed away in 1948, but his brilliant formulation – The Wave principle or The Elliot wave Theory – continues to produce amazingly accurate results till this day, rewarding the faithful in the process.

The Elliott Wave Ralph Nelson Elliott developed the Elliott Wave theory in 1920, a time when trading decisions in stock markets were based on herd psychology, not on any technical analysis. During these times, stock prices moved in a chaotic manner, and when these prices were plotted in the form of a chart the resultant curves offered no clue about price trends. In such a confusing scenario, Elliott saw a method in the madness – he discovered that despite the herd mentality and the resultant chaos, stock prices were indeed following a definite pattern. He figured that the prices of stocks, though influenced by investor psychology, traded in cycles that repeated themselves. His assumption was based on one of the fundamental rules of physics – that every action is followed by a reaction. You would be surprised to know that almost every technical indicator in use today is inadvertently based on this principle. (In that sense, Elliott was way ahead of his times.) For example: when people buy and there is euphoria in the market, demand increases, stock prices climb and as a result the supply drops – this comprises the action; now, while stock prices are climbing, some investors book profits or short the stock for whatever reason, so supply increases and demand drops along with the stock prices – this is the reaction. This action and reaction keeps making a wave-like pattern, the interpretation of which can predict a stock’s future price.

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The Basics of the Elliott Wave Theory According to Elliott, herd mentality in general follows cycles of optimism followed by pessimism, and the same holds for the minds of the investors/traders. These are reflected as a sequence of predictable ups and downs in the stock market, the ups representing the dominant trend and the downs the corrective phase in a bullish market – and vice versa in a bearish market. Elliott discovered that the wave patterns made on the charts had the unique mathematical characteristics of what came to be known later as “fractals” – mathematical/geometric structures that keep repeating themselves infinitely on an ever-diminishing scale. By applying fractal mathematics to price movements in the market, Elliott developed his wave theory to make market predictions based on collective crowd behavior. The main points of the Elliott wave theory can be summarized as: A stock’s price chart makes a sequence of waves representing the dominant (or main) trend followed by a corrective phase, where the overall price movement is against the trend. The dominant trend (which can be upward or downward, depending upon the mood of the market) is always comprised of 5 waves while the corrective phase is always comprised of 3 waves, as depicted in Figure 1 for a bullish market.

The dominant trend waves are labeled as 1, 2, 3, 4, 5, while the reactive phase waves are labeled as A, B, C. Of the 5 waves within the dominant trend, three moving in the direction of the trend (1, 3, 5) are referred to as impulse or motive waves and two moving against the trend (2, 4) as corrective waves. Similarly, the corrective phase is comprised of one impulse wave (B) and two corrective waves (A, C). Each of these waves is further subdivided into the 5-3 wave pattern, the dominant ones with 5 waves and the corrective ones with 3 waves, as shown in Figure 1, and the pattern keeps repeating itself on an ever-smaller scale. For example, in the first subdivision this results in a total of 5 smaller waves in each of the impulse waves (1, 3, 5, A, C) and 3 smaller waves in each of the reactive waves (2, 4, B), as depicted by the middle curve. When each of these smaller waves is further subdivided into 5-3 wave patterns, the impulse waves will consist of 21 subwaves and the reactive waves 13 sub-waves.

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Why is Elliott Wave Theory used by traders? In the 1970s, two authors – Frost and Prechter – published a book entitled “The Elliott Wave Principle – The Key to Stock Market Profits”. In the book, they accurately predicted the bull market of 1970s and the crash of 1987. These predictions were bang on the ball, making the Elliott wave theory a darling of all technical analysts, traders and investors. And this is how traders interpret the different waves in the Elliott wave pattern.

Understanding and interpreting the waves Wave 1: This wave is the least obvious when it begins building up. According to the Elliott theory, the beginning of every bull market is characterized by a flow of negative fundamental news. Almost every trader is in a bearish mood and analysts keep downgrading earnings and stock price targets. The economy too looks in tatters. Prices may move up with volumes, but not enough to give a trend-reversal signal to traders. Wave 2: This wave corrects the upward movement initiated by Wave 1, but does not retrace the movement back to where Wave 1 began. It retraces up to 61.8% of the Wave 1 gains. The fundamental news is still negative and the sentiment still bearish. Wave 3: This is the largest and the strongest wave in a trend. The news remains negative at the start of the wave, but turns positive by the time the wave reaches its midpoint, which is when analysts begin raising earnings and price estimates. Prices shoot up and the corrections are almost nothing. Investors who miss the boat do not get a chance to buy into the market. Wave 3 reaches 161.8% of Wave 1. Wave 4: During wave 4, prices move sideways and correct themselves. Wave 4 lasts for a longish period and the extent of the drop in Wave 4 is about 38.2% of Wave 3. This period presents a good time to buy stocks. Wave 5: This is the final impulse wave. During this wave, the news is all-round positive and the market is thick with bullish sentiment. The common man now has seen enough rise in stock prices and wants to grab a slice of the pie, so he begins buying too. Volumes drop, which can be confirmed with volume indicators, and bears vanish from the scene. Wave 5’s mid-point is like the peak of a bull market. Wave A: Though the market has turned from bullish to bearish, the news is still positive. Analysts dismiss the first fall as a much-needed correction in an overheated bull market. During the length of Wave A, short positions build up in the futures market and prices turn very volatile. Wave B: The price reversal gathers steam, the bull market is gone and bears emerge out of nowhere. Volumes drop and fundamentals begin worsening, but analysts and investors keep hoping against hope that the tide will turn. Wave C: Represents a full-blown bear market. Wave C is as large as Wave A and lasts 161.8% longer than it. From this wave on, prices begin moving downwards and the cycle of waves Trading Synergy, Inc. http://www.tradingsynergy.com Copyright 2009, Trading Synergy Inc. All rights reserved. This document may not be reproduced in part or whole without express written consent.

continues. But this time the downtrend being the main trend is comprised of 5 waves, and the upward corrective phase is comprised of 3 waves. Now, let’s turn our attention to the second person whose discovery so many traders hold in high regard…

The History of Fibonacci Ratios Fibonacci ratios derive their name after their inventor Fibonacci. Also known as Leonardo of Pisa alias Leonardo Pisano alias Leonardo Fibonacci alias Leonardo Bonacci, Fibonacci (ca. 1170 – ca. 1250) is recognized as being one of the greatest mathematicians of the Middle Ages. He was born in Italy but got his education mainly in North Africa, where he accompanied his merchant father. It was on his trips abroad that Fibonacci got fascinated with mathematics and picked up vast knowledge of mathematics from different countries. Fibonacci is best remembered for his book Liber Acaci, which introduced the concept of Hindu– Arabic numerals to Europe, where only Roman numerals were in use till then. Another mathematical concept that is attributed to Fibonacci is that of Fibonacci sequence and Fibonacci ratios, though there is some evidence that these ratios were already known to the ancient Hindu mathematicians. But it was Fibonacci who introduced them to the modern world.

What's the history of this mystery? When Fibonacci was in Egypt, he was fascinated by the great pyramids of Gizeh. It was during a study of the geometrical structure of these pyramids that the seed of Fibonacci sequence and Fibonacci ratios was born, the most important outcome of this study being what is known as the Golden Ratio, represented symbolically by the Greek letter phi and also known by names as the Divine Ratio, Divine proportion, and Golden Mean. Simplistically speaking, two numbers are said to be in Golden Proportion if the ratio of their sum to the larger number is the same as the ratio of the larger number to the smaller one, the value of the Golden Ratio being approximately 1.618. For example, 55 and 89 are in Golden Proportion because (55+89)/89 = 89/55 = 1.618… The unique characteristic of the Fibonacci sequence (0, 1, 1, 3, 5, 8, 13, 21, 34, 55, 89, 144, …) is that, as it progresses, the ratio of any two successive terms (34/21, 55/34, 89/55, etc.) approaches the Golden Ratio and that of any two alternate terms (8/21, 13/34, 21/55, etc.) approaches 0.382, which equals 1 – 0.618. Note that the reciprocal of the Golden Ratio (21/34, 34/55, 55/89, etc.) is Golden Ratio minus 1, i.e., 0.618…

Significance of Fibonacci Ratio in Nature The reason why the Fibonacci Ratio or the Golden Ratio is also referred to as the Divine Ratio or Divine Proportion is that most natural formations seem to manifest the Fibonacci sequence or Fibonacci ratio in the arrangement of their structures. For example, it has been observed that the number of petals on many flowers is more often than not a Fibonacci number (3, 5, 8, 13, 21, 34, 55, etc.). Similarly, be it the distribution of seeds in sunflower, the spirals in pine cones,

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fruitlets of a pineapple, the shells of snails, arrangement of leaves on a stem, or even the human body – they all manifest Fibonacci numbers in some form or the other. Finally, even the financial markets have not been able to escape the magic of Fibonacci ratios. More often than not, trend reversals are found to occur at Fibonacci ratios. No one knows if the appearance of Fibonacci ratios in so many natural phenomena is due to some divine design, or things just follow an optimal design that is dictated by aesthetic appeal as well as functional efficiency.

Fibonacci Ratios Leonardo Fibonacci, a 13th century accountant-turned-mathematician, made a startling mathematical discovery. He found that the sequence of numbers where every new number in the sequence is obtained by adding the previous number to its predecessor (i.e., 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, …) has very fascinating and unique properties that are revealed in many natural phenomena too. This sequence of infinite numbers is now referred to as Fibonacci sequence. What is so interesting about Fibonacci sequence? Fibonacci discovered that as the Fibonacci sequence progresses, the ratio of each number to its immediate follower approaches a constant value of 0.618 (also called the Golden ratio): for example, 34 ÷ 55 = 0.618…; 55 ÷ 89 = 0.618…; 89 ÷ 144 = 0.618…, and so on. Surprisingly, the ratio of each number to its predecessor (e.g., 55/34, 89/55, 144/89, etc.) approaches a constant value of 1.618 as the sequence progresses. Not just that, the ratio of alternate terms in the sequence approaches a constant value of 1– 0.618 = 0.382! Similarly, the ratio of each number to a number that is three places ahead approaches 0.236 (e.g., 8/34, 13/55, 21/89, 34/144, etc.) The ratios 1.618, 0.618, 0.382, 0.236, etc., describing the relationship between various terms of the Fibonacci sequence are referred to as the Fibonacci ratios. Now we’ll discuss why and how these ratios are used in technical analysis of the stock market. Importance of Fibonacci ratios in trading As mentioned earlier, Fibonacci ratios appear in Nature everywhere, and financial markets are no exception. It has been observed that markets often tend to reverse at levels defined by Fibonacci ratios. Even support and resistance levels seem to have a higher probability of forming at Fibonacci ratios (e.g., 161.8%, 61.8%, 38.2%, 23.6%, etc.). For example, if the stock market rallies 100 points, it is usually found to correct at 61.8% level. Knowing these probabilities can help a trader predict market trends.

Using Fibonacci ratios in the stock market This is how the Fibonacci ratios are used in stock/commodity/Forex/Indices technical analysis:

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1. 2. 3.

4.

A stock’s price chart is observed, say for a period of 6 months, and the highest price and the lowest price level that the stock has hit are marked on its price chart. The distance between the lowest point and the highest point is calculated. This distance is divided into four parts in the ratios of 0.618, 0.50, 0.382 and 0.236. Horizontal lines are drawn to represent the figures derived. The 0.50 is not a Fibonacci number, but is used because it has been observed that an asset’s price continues to move in a linear direction once it completes a 50% retracement. These horizontal lines are used to identify probable support and resistance levels. They represent critical points from where a stock’s or an asset’s price can deviate and reverse from their current direction.

In most of the cases, these lines work like magic. You also don’t have to do the calculations yourself, as your trading software (such as IntrepidTrader) will take care of it. It is also not clear why the Fibonacci ratio works so efficiently. Maybe it does because it is the golden ratio that is connected to human psychology right from times immemorial.

The Elliott Wave and Fibonacci Ratios Both the Fibonacci Ratios and the Elliot Wave Theory are complicated subjects. However, when they are applied to stock and forex markets, their results are magical. Many traders swear by them, which is why they are so popular even today – many, many years since they were introduced. Elliott Wave Theory The Elliot wave theory can be briefly summarized as follows: The ups and downs in the stock market follow a 5-3 wave pattern, a 5-wave pattern along the dominant trend and a 3-wave pattern in the reactive phase moving against the dominant trend. This 5-3 pattern keeps repeating itself on an ever-smaller scale. It doesn’t matter whether the markets are bullish or bearish, they always move in such 5-3 wave patterns. Though Elliot Wave Theory can be applied to individual stocks, futures, commodities and Forex markets, it works better when applied to different indices such as Dow, Nasdaq, S&P 500, Indices of different industries, Composite Index, and markets with good liquidity. The Fibonacci ratios and financial markets The Fibonacci ratios represent ratios of different terms in the Fibonacci number sequence, defined as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, … Note that each term in the sequence, after the first two terms, is obtained by adding the previous two terms. The unique property of this sequence is that the ratios of different combinations of terms (e.g., the ratio of any two neighboring terms, the ratio of any two alternate terms, the ratio of any two third-place terms, etc.), individually approach a constant value as the sequence progresses. For example, neighboring terms ratios 8/13, 13/21, 21/34, 34/59, 55/89, etc., all approach a constant value of 0.618; neighboring terms ratios 13/8, 21/13, 59/34, 88/59, etc., all approach a constant value of 1.618; alternate term ratios 5/13, 8/21, 13/34, 21/55, 34/89, etc., all approach a constant value of 0.382 (which is surprisingly equal to 1– 0.618). Similarly, the ratios of thirdTrading Synergy, Inc. http://www.tradingsynergy.com Copyright 2009, Trading Synergy Inc. All rights reserved. This document may not be reproduced in part or whole without express written consent.

place terms 8/34, 13/55, 21/89, 34/144, etc., all approach a constant value of 0.236, and so on. These ratios 1.618, 0.618, 0.382, 0.236, etc., are referred to as Fibonacci ratios. It has been noticed for years that market reversals coincide with the Fibonacci ratio 0.618. For example, if the Dow crashes by 200 points, it will more often than not recover 61.8% of the fall in a relief rally that follows the crash. Then it will begin falling again. Other ratios too are important and have different significance. Why these ratios work, no one knows. Is it because the Fibonacci ratio is a predetermined cosmic theory? Is it because most traders are following the Fibonacci ratio and are acting according to its calculations? Well, no one knows, but the fact remains the Fibonacci ratios work.

Elliot Wave – Fibonacci Ratios trading signals The Fibonacci ratios are commonly used to predict trend reversals, and also to predict support/resistance levels. During a bullish market, traders peg the support levels at 61.8% (Fibonacci ratio 0.618) below the level to which the market has moved up to, and resistance levels at 161.8% (Fibonacci ratio 1.618). In a bear market, the resistance levels are pegged at 61.8% above the level to which the market has fallen, and the support levels are marked at 161.8%. This is how the Elliot wave theory and Fibonacci ratios work together – At the start of a bull or a bear market, there is a strong rise or fall in the prices, followed by a reaction wave against the main trend. This reaction or corrective wave then retraces up to 61.8% of the rise/fall. If you manage to identify Wave 1 in any trend, which is very hard to identify in the first place, consider yourself lucky. This is a truly golden trading signal. Otherwise you can take a trading opportunity during Waves 2 and 4. Wave 4 during any market is characterized by a sideways movement that lasts for a long period of time. It is a corrective wave and, therefore, a good opportunity to buy stocks when the dominant trend is bullish or a great time to sell stocks when the dominant trend is bearish. The length of Wave 4 is about 38.2% (Fibonacci ratio 0.382) of Wave 3. Apart from the above trading signals, here are two general trading signals derived from the Elliot Wave Theory – Fibonacci Ratio combine: 1.

2.

In a bullish market, sell out your holdings when nearly every third common man begins talking about the stock market and keeps chasing stocks, including stocks of badly managed companies. This behavior will be noticed when Wave 5 is at its midpoint. At this juncture, fundamental news is good and people’s collective psychology drives popular perception that market will keep going up, even though it seems fairly priced. In a bearish market, buy stocks when nearly every common man begins talking about what a disaster the stock market is and how they lost money. During this time the economic news isn’t rosy and people get the feeling the market will keep tanking. This behavior will be noticed when Wave 5 is at its midpoint.

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Before you attempt to analyze the market using the Elliot–Fibonacci theories, you need to pick up some proficiency in technical analysis. So, practice well and be patient – once your analysis begins predicting trends correctly, only then should you venture into a trade.

Your Next Step To assist you with the learning curve often associated with mastering these concepts, we have a weekly newsletter to assist you. This newsletter is available without charge to you. It’s no doubt that this information is very valuable. So, why are we giving it away for free? The information in the newsletter is based on our real time newsletter which was released a week earlier. Our clients (a mixture of beginners and market professionals) saw this informaiton a week before it is made available to you. So, while you may not be able to act on the information in the newsletter, you will be able to follow the analysis and sharpen your skills.

How do I sign up for the free newsletter? If you received the report you are now reading from one of our websites, you are already signed up. You should receive your first copy next Sunday. However, if you happened to receive this report from a friend, you will need to go to our website (www.tradingsynergy.com) in order to sign up.

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