Fibonacci Ellipse

The Fibonacci Ellipse is a technical analysis tool that is based on the Fibonacci sequence and uses ellipses to identify potential support and resistance levels in a market. It is a variation of the Fibonacci Retracement tool.

The Fibonacci sequence is a series of numbers where each number is the sum of the two preceding numbers: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on. The Fibonacci ratios derived from this sequence, such as 0.382, 0.618, and 1.618 (also known as the golden ratio), are widely used in technical analysis.

To construct a Fibonacci Ellipse, you start by selecting a significant low or high point in the price chart. This point represents the starting point of the ellipse. Then, you measure the distance from this point to a subsequent swing high or low, which should correspond to a Fibonacci number (e.g., 21, 34, 55, etc.).

Next, you multiply this distance by the Fibonacci ratios (0.382, 0.618, and 1.618) to determine the lengths of the major and minor axes of the ellipse. These ratios help to create an elliptical shape that expands and contracts around the starting point.

The ellipse is then drawn with the starting point as the center and the major and minor axes as the lengths determined by the Fibonacci ratios. The ellipse acts as a visual representation of potential support and resistance levels.

The major axis of the ellipse represents a strong potential resistance level, while the minor axis represents a strong potential support level. Traders and analysts look for price reactions at these levels, such as bounces or reversals, to make trading decisions.

It’s important to note that Fibonacci Ellipses, like other technical analysis tools, are not foolproof and should not be used in isolation. They should be used in conjunction with other indicators, chart patterns, and analysis techniques to confirm potential trade setups.

In summary, the Fibonacci Ellipse is a technical analysis tool that uses ellipses based on Fibonacci ratios to identify potential support and resistance levels in a market. It is constructed by measuring the distance from a significant point to a subsequent swing high or low and multiplying it by Fibonacci ratios. The resulting ellipse represents potential levels where price reactions may occur.