What is a 'Phi-Ellipse'

A phi-ellipse is an investment tool used in technical analysis that is also known as the Fibonacci ellipse. The phi-ellipse derives its name from the fact that Fibonacci sequences are natural derivatives of phi and pi, Egyptian cubic units of measure.

Generally speaking, phi ellipses are used to detect price patterns so investors are better capable of forecasting pricing moves, and therefore, able to detect when a buy or sell is in order. These patterns found in the ellipses have practical application to many trading forums, such as Forex trading platforms.

BREAKING DOWN 'Phi-Ellipse'

The phi ellipse is used by traders to identify general market trends, in contrast to standard Fibonacci technical tools that attempt to determine resistance and support levels. Once three points are identified on a chart, the phi-ellipse can be drawn. The phi-ellipse is a three-wave price point that can help illustrate the main trend.

To draw a phi-ellipse, three points must first be selected: the first one is just an arbitrary point, the second is the peak that occurs after that arbitrary point and is identified by a reversal from the peak. The third point is another reversal back to the original direction of the trend. The third and final point also confirms the market trend. Once the ellipse is drawn, the line that bisects this ellipse is used to indicate the trend.

A Fibonacci trading tool used to aid investors in identifying price movements. Essentially, using this model, investors attempt to buy high and sell low. One of its main uses is to identify the underlying structures of price movements by analyzing the changing shape of the ellipse. The phi-ellipse is normally drawn by a computer program due to its complexity.

Using a Phi-Ellipse for Investing

Using a phi-ellipse or other Fibonacci trading tools, including phi spirals, can help illustrate price patterns that would be more difficult or even unseen by the naked eye, in order to guide investing. In some cases, investors will choose stocks that go against the direction of the main trend identified by the phi-ellipse.

To interpret the results of the phi-ellipse, the investor will look at the angles of the ellipses. The steeper the angle of the plotted phi-ellipse is, the higher the price correction will be. In many cases, investors will use the phi-ellipse, along with other investment prediction tools to guide their strategy for even more effective results.

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