Fibonacci ratios are extremely important in determining length of waves, motive or not. This page will deal with motive, or trending waves only.
The golden mean (.618 and 1.618) is the most important fibonacci ratio in any market. Its reciprocal (.382), is the second more important number.
With motive waves, once you have a complete first wave (of five waves), which is confirmed by a second wave that retraces .618 of the length of the first wave, you have a very good indication of what lies ahead:
- The third wave should trace out a length that is either 1.618 X the length of the first wave (measured from the apex of the second wave) or 2.618 times the length of the first wave (we call this longer length an extended third wave).
- The fourth wave should retrace (or correct) .382 of the length of the set of waves so far, measured from the beginning of the first wave to the end of the third wave). The fourth wave usually retraces to meet the apex of the previous fourth of one lesser degree (in other words, the fourth wave of the third wave, keeping in mind that in motive waves, the third wave will itself trace out subwaves of 5 waves).
- The fifth wave can be one of several lengths (and relates to the length of the first wave): .618 (very rare), 1.00, 1.618 (most common), or 2.618 (extended).
Once a set of 5 motive waves has traced out completely, that’s considered a first wave of higher degree and the market will then retrace 62% of that wave to create a second wave of higher degree. The rest of the pattern above will then trace out in a third wave (1.618 X the length of the entire first wave of 5) and so forth.