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. These patterns may help some traders analyze the market and determine when to buy or sell a security. These patterns can be used in all markets, such as stocks, forex, or futures.

Key Takeaways

  • Phi-ellipse is a three-point technical analysis tool based on Fibonacci ratios that connects swing high and swing low prices to determine trend direction and possible reversal points.
  • The indicator is not common, and may not be available on all charting platforms.
  • The ellipse drawing tool is not the same as a phi-ellipse, as it may not align with Fibonacci ratios.

What Does the Phi-Ellipse Tell You?

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 (but could be a price swing low), the second point 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 is used to aid investors in identifying price movements. 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.

Example of How to Use the Phi-Ellipse

Using a phi-ellipse or other Fibonacci trading tools, including phi spirals, can help illustrate price patterns that would be more difficult to see with the naked eye, in order to guide trading decisions.

To interpret the results of the phi-ellipse, the investor will look at the angles of the ellipses. Price moves outside the phi-ellipse indicate a potential trend change. Where the line bisects at the bottom/top of the phi-ellipse may be a reversal point.

Multiple phi-ellipse in the same direction can often be contained in a larger phi-ellipse which will provide trend and reversal information for the entire trend.

The phi-ellipse is not commonly available on most trading and chart platforms as it is not as popular as other tools, such as Fibonacci retracements or Fibonacci extensions.

Difference Between the Phi-Ellipse and the Fibonacci Arc

A Fibonacci arc connects a high and low point. Arcs extend out to the right from the high and low, indicating potential support (uptrend) or potential resistance (downtrend) levels that the price may reach in the future. These levels may provide trading opportunities.

Limitations of Using the Phi-Ellipse

The phi-ellipse is not a common indicator, and therefore hard to find on most trading software. The ellipse drawing tool available in most charting platforms won't necessarily align with Fibonacci ratios.

The phi-ellipse is determining trend direction based on recent swing highs and lows. These can be seen with the naked eye so the indicator adds little in terms of determining current trend direction. It may provide potential reversal points, similar to a broken trendline, yet the projections aren't always accurate. The price could move out of the phi-ellipse but then move sideways or continue moving in the original trend direction.

The indicator is best used in conjunction with price action analysis and other technical analysis tools to help confirm phi-ellipse signals and analysis.