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If you look around the net you will often see the two names Fibonacci and Elliot wave come up as great ways to make you money in forex trading. Here we will look at the merits of both and how useful they are and how they can lead you to currency trading success.
Both theories are based on the scientific theory of market movement lets take a look at them.
1. Fibonacci Numbers
The Fibonacci sequence was devised by Leonardo Fibonacci in 1202. The Fibonacci number sequence was based around the following equation:
How many pairs of rabbits can be generated from one single pair, if each month each pair produces a new pair, which, from the second month, starts producing more rabbits?
The result was a number sequence popular throughout the natural world and the equation is as follows:
If Fn is the nth Fibonacci number, then successive terms are formed by addition of the previous two terms, as Fn+1 = Fn + Fn-1, F1 = 1, F2 =
The ratio of any number to the next larger number is 62%, which is a popular Fibonacci retracement number. The inverse of 62% is 38%, and this 38% The two levels considered the most critical by traders are therefore: 38.2% and 62.8%. Other important percentages are: 75%, 50%, and 33%.
Do they work in trading?
The answer is sometimes - but you can pick any retracement you like and that will work sometimes, but thats not scientific just luck . The number sequence is loved by the far out investment community with its mystical connotations - but its no real use in trading and if Leonardo Fibonacci was around today, he would probably be horrified by the way his theory has been hijacked.
Elliot Wave Theory
The theory was named after Elliott himself, who concluded in his book "nature's law" that: The movement of financial markets could be predicted by observing, and identifying a repetitive pattern of waves and patterns move to a scientific theory.
So Elliot claims to have found the underlying scientific theory of market movement so all you do is follow it and make money? WRONG.
Of course any scientific theory by definition is objective and works all the time - in Elliot wave there is no Objectivity it's all left to the user to work it out! Well that's not scientific.
I am going to ignore the fact that Elliot made no money with his theory and simply say - his definition of scientific is different to most peoples and drawing a load of peaks and troughs in any time period you like, is not science and unlikely to make you long term profits.
A Fundamental Error Of Both Theories
Is to assume that markets move to a scientific theory its obvious they don't because if they did we would all know the price in advance and there would be no market!
This is common sense. Furthermore, prices are determined by humans and they are not logical, when trading markets and certainly not predictable.
If you want to make money trading you need to forget scientific theories and trade the odds - as that's the best you can do but if you trade the odds, you can make a lot of money. So forget Fibonacci and Elliot wave and use some objective odds based rules in your forex trading strategy and enjoy currency trading success.
