by Jill Noble
Updated: September 12, 2013
Most traders who use Elliott understand that Fibonacci ratios can strengthen their analysis of price charts at any time frame -- are you one of them?
If so, you likely know that Fibonacci retracements and extensions can help identify the depth of corrective waves, and the distance impulse waves will travel. After all, the Fibonacci sequence is the mathematical basis of the Wave principle: the Elliott method often discerns these "golden" ratios and relationships.
Jeffrey Kennedy, editor of our video educational service Trader's Classroom, shares the ins-and-outs of nearly every aspect of technical trading 3-5 times a week for subscribers. The following lesson is adapted from his teachings.
Reverse Fibonacci is a technique [Kennedy] developed over a decade ago in order to identify high-probability trade targets. Its application is simple in that, regardless of what wave is forming, only three Fibonacci ratios are used: 1.382, 2.000 and 3.000.
The difference between Reverse Fibonacci and standard Fibonacci projections for Elliott waves is the multiplier. Normally, impulse waves are the multiplier for other impulse waves. Reverse Fibonacci uses corrective waves to identify objectives for subsequent impulse waves. For example, wave two is the multiplier for wave three and wave four is the multiplier for wave five.
Reverse Fibonacci is a technique that has stood the test of time by consistently providing high-probability objectives for developing waves. Enhance this approach by combining it with standard Elliott wave projections.
In the following Halliburton chart, you can see how the Reverse Fibonacci method works: Kennedy focuses on the preceding (reverse) move. He measures the depth of Wave 4, multiplies it by 1.382 and then projects that upward:
(The "standard method" is in blue, Reverse Fibonacci is in red)
This unique method is only one of many useful tools that Kennedy uses to evaluate the markets.