Fibonacci Expansion is the linear instrument of the technical analysis used to determine the third wave. It is very similar to such instrument as Fibonacci Retracements with the exception that expansion is built along two waves rather than along one trend line.
How to build Fibonacci Expansion
Fibonacci Expansion is built along three points, which describe two waves. To start with, we put the line of the first line (top – bottom, bottom – top) thereby uniting two points. Further the distance of the first wave will be taken as a singular cutting. Then from ending point of the second wave (point 2), we lay the second line to the ending of the second wave. This way we get three connected points, which serve as benchmarks for building invisible line over the distance equal to 61,8 %, 100 % and 161,8 %. Ending of 3 wave is expected on the level of 161,8 %. As per the law of Elliott Waves, that is the ideal ratio between the longest momentum wave to the shortest wave.
Pic. 1 Fibonacci expansion
The people acquainted with wave theory remember that wave 3 quite often can take an extension form. It is accepted that when the third wave exceeds ideal "golden ratio" 1,618, it takes an extension form. Of course, this is not a tough rule, but such specifics should be taken into account. Also it is important to note that in terms of wave analysis and Fibo math methods, 50 level is not the key level in Fibo and it only validates the middle of the range.
Fibo expansion is supplementary in the deal of determining the third wave. Expansion levels prove their use as the lines of resistance and support. Basing themselves on the wave principle (small waves create larger wave models), many wave traders apply Fibo expansion to determine the end of the 5th wave or end C correction wave
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