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Trading is a game of probabilities, and some of the best tools I use to stack those probabilities in our favor are Fibonacci levels and Elliott Wave Theory.
While they might sound complex, these tools are rooted in human psychology and natural patterns, making them indispensable for traders looking to gain an edge.
Fibonacci and Elliott Wave Theory aren’t magic wands, but when combined, they offer a powerful framework for predicting market movements and identifying high-probability trade setups.
They’re also a crucial part of my daily stock chart routine on “Morning Monster,” my 9:15 a.m. ET livestream on YouTube Monday through Friday — be sure to join in the fun here!
So let’s dive in and discuss how I use them.
What Are Fibonacci Levels?
Fibonacci levels are based on a sequence of numbers identified by mathematician Leonardo Fibonacci in the 13th century. These numbers — which start with 0, 1, 1, 2, 3, 5, 8, 13, and so on — are derived by adding the previous two numbers in the sequence.
When applied to trading, the ratios derived from this sequence ( 50%, 61.8%, 78.6%, 127.2%, and 161.8%) are used to identify potential profit targets, and areas of support and resistance. | | | | |
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Here’s the idea…
Markets move in waves, and Fibonacci levels help you measure those waves. When prices retrace after a strong move, they often stall or reverse around these key levels.
For example, a common retracement is to the 61.8% level — also called the “golden ratio” because of its prevalence in nature and human behavior. | | | | |
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What is Elliott Wave Theory?
Elliott Wave Theory takes this concept further by categorizing market movements into predictable wave patterns. Developed by Ralph Nelson Elliott in the 1930s, this theory suggests that markets move in five-wave patterns during uptrends, and three-wave patterns during corrections.
In a bullish trend, you’ll see:
| | • | | Wave 1: The initial move higher as early buyers step in.
| | | • | | Wave 2: A typically fast paced retracement where profit-taking occurs, but prices will not return to the starting point.
| | | • | | Wave 3: The strongest wave, fueled by widespread participation.
| | | • | | Wave 4: A smaller pullback, typically lasting 3-5x longer than the wave 2 correction as the trend takes a breather.
| | | • | | Wave 5: A final push higher before the trend exhausts. Many times a proportionally similar size move to the wave 1 move. |
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In corrections, you’ll often see a three-wave counter-trend movement labeled A-B-C. (Note: There are several more complicated corrective structures beyond this quick explanation).
How Fibonacci Levels and Elliott Waves Work Together
This is where things get exciting!
Elliott Waves give you the structure of the market, and Fibonacci levels help you measure potential targets and retracements within that structure.
For example:
| | • | | Wave 2 often retraces to the zone between 50% and 78.6%, or most ideally the 61.8% Fibonacci retracement level of Wave 1. | | | • | | Wave 4 typically pulls back to the 38.2% level of Wave 3. | | | • | | Wave 3 often extends to 161.8% of Wave 1 (sometimes even more), offering a strong target for trend traders. |
By combining these tools, you can identify where a market is likely to reverse or continue, giving you a roadmap to plan your trades…
Which I call my Market Roadmap, and use in all my trading! | | | | |
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Fibonacci levels and Elliott Waves are invaluable tools for understanding market psychology and price behavior. They’re not infallible — no trading strategy is — but they provide structure in an often chaotic market.
And you don’t have to master these concepts…
Most people don’t want to spend the time learning the ins and outs, but I enjoy it — so why not follow me!
As always, keep your risk in check and stay disciplined. The market rewards those who are prepared.
Tomorrow, I’ll discuss how the Market Roadmap line and Fibonacci retracements come together for a repeatable high probability trade setup that you can find on the daily chart. | | | | |
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| | | | Jeffry Turnmire
Jeffry Turnmire Trading
P.S. You can also join my free Telegram channel and start getting trade ideas, real-time insights and market analysis, and notifications about my live events right before they start and more!
Join my FREE Telegram channel here!
I also have a market-open livestream at 9:15 a.m. ET weekdays on YouTube, and a weekly show at 5 p.m. ET on Tuesday. You are more than welcome to join the fun!
YouTube: https://jeffrytrader.com/youtube
Important Note: No one from ProsperityPub or Jeffry Turnmire Trading will ever send you direct messages on Telegram. Anyone purporting to be me or anyone from my company is a scammer. I do respond to comments on YouTube myself, so be sure to hit that Subscribe button and join the conversation! | | | | |
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