Phi Ellipses and Uses

What Are Phi Ellipses?

Phi ellipses are a Fibonacci trading tool used to aid investors in identifying price patterns, trends, and potentially trend reversals. The phi ellipses resemble an oval, drawn around price waves, highlighting the price's path. When the price moves outside the phi ellipses, a new price pattern or trend direction is starting.

What Do Phi Ellipses Tell You?

Phi ellipses are a little-known trading tool used to detect price patterns so investors can monitor current and past price patterns in an effort to determine when to buy and sell. Phi ellipses are used with stocks, stock indexes, currencies, futures, and may be applicable in other markets as well.

One of the main uses of phi ellipses is to identify the underlying structures of price movements by analyzing the changing shape of the ellipses. Phi ellipses can also be linked together. For example, during a long-term uptrend, each major up wave could be encompassed in a phi ellipses, as could each pullback. When the price breaks out of the trending wave phi ellipses, it indicates a pullback may be starting. When the price moves out of the pullback phi ellipses, it indicates the price may be starting to move in the trending direction. A phi ellipses can then be drawn around the entire trend to indicate when the long-term trend may be ending — when the price moves outside the phi ellipses.

The phi ellipse is drawn by a computer or trading/charting software package since it is based on precise measurements.

Ellipses are a common drawing tool on trading platforms. They are essentially an oval shape, but are not necessarily based on the Fibonacci ratios. Ellipses are converted to phi ellipses through a Fischer-transform mathematical term discussed in Candlesticks, Fibonacci, and Chart Pattern Trading Tools and The New Fibonacci Trader, both by Robert Fischer and Jens Fischer.

Example of How to Use Phi Ellipses

The phi ellipses' main function is to highlight current market patterns, such as trends that include both moves in the trending direction and pullbacks. If phi ellipses are drawn around an uptrend, a long trade could be exited when the price breaks through the bottom of the phi ellipses.

Similarly, in a downtrend, a trader could exit their short position when the price moves above the top of the phi ellipses.

During a trend, many phi ellipses may need to be drawn and adjusted to fit the price action as it unfolds. This means working with this tool can be an art.

Phi ellipses are not commonly available on trading or charting platforms. The S&P 500 ETF Trust (SPY) daily chart below shows ellipses, simply to highlight the general purpose of the indicator. These are not phi ellipses.

 TradingView

The Difference Between Trendlines and Phi Ellipses

Trendlines can also signal when a potential trend change is underway. Trendlines are drawn along the swing lows of an uptrend or the swing highs of a downtrend. When the price moves past the trendline, once drawn, it may signal a possible trend change. Like the phi ellipses, trendlines often need to be adjusted, and can be drawn on short-term and long-term trends.

Pros and Cons of Phi Ellipses

Phi ellipses are capable of integrating both price and time in a single analysis. The phi ellipses can dynamically adjust to price moves. Phi ellipses can be used on all time frames but may become cumbersome when day trading due to the constant drawing and adjustments.

When the price moves out of the phi ellipses in the opposite direction of the angle of the phi ellipses (uptrend and price breaks below the phi ellipses), it helps to signal a potential trend change or an exit point for longs. This may occur before other technical indicators signal a trend change.

Phi ellipses develop over time. Although all phi ellipses share a common look, their final form varies, becoming thick, thin, long, or short. Normally investors can spot the smaller trends, which are already part of a bigger trend. Therefore, once a larger trend is identified, phi ellipses can be used as entry and exit points within it.

Among the negative aspects of phi ellipses, traders cannot program them to operate as a fully automated trading signal; a trader needs a lot of discipline to work with the tool effectively, and traders must be familiar with applying phi ellipses to price charts in order to make use of the information they provide. The tool needs to be adjusted, and may need to be drawn or redrawn frequently depending on the time frame being traded. Trading with phi ellipses seems simple, but it takes a lot of practice to draw them and trade them properly.