What is Elliott Theory? - Guide Part 38
What is Elliott Theory?
Ralph Elliott based his approach on the behavior of traders. He believed that traders and investors repeated the same actions. Therefore, the market highs and lows can be easily predicted. Elliott Wave Theory is based on the behavior of traders.
Vital principle of the Elliott wave theory of the 1930s.
The way it works is as follows: An 'Impulse Wave' (typically derived from a main trend) always shows five other waves within its pattern. In turn, each wave in that pattern also shows five more waves within it. The pattern repeats endlessly.
The Pattern
Costs alternate between an impulsive or driving phase and a corrective phase on each of the trend timescales. The impulses are constantly divided into a group of 5 lower level waves, which in turn alternate between motor and corrective character, with waves 1, 3 and 5 being pulses and waves 2 and 4 being small setbacks of waves 1 and 3.
Waves 1, 3, and 5 remain pulsating and are broken down into 5 subordinate pulses labeled ((i)), (ii)), (iii)), ((iv)), and ((v)). Waves 2 and 4 are corrective waves and are divided into 3 subordinate waves labeled ((a)), (b)) and ((c)). The 5 shafts that move in shafts 1, 2, 3, 3, 4 and 5 form a higher drive shaft (1).
Corrective waves are divided into 3 lower level waves called ABC. Corrective waves begin with a 5-wave counter-trend promotion (wave A), a retracement (wave B) and another promotion (wave C). The 3 waves A, B and C form a higher level correction wave (2).
In a bear market, the prevailing trend is down, so the head is reversed: 5 waves down and 3 waves up.
Eliot Easy:
Eliot Chart:
SuperMilenium: (1) 2) (3) (4) (5) (A) (B) (C) (W) (X) (Y)
Millennium: (1) (2) (3) (4) (5) (A) (B) (C) (W) (X) (Y)
SubMilenio: 1 2 3 4 5 A B C W X Y
Grand Super Cycle: ((I)) ((II)) ((III)) ((IV)) ((V)) ((a)) ((b)) ((c)) ((w)) ((x)) ((y))
Super Cycle: (I) (II) (III) (IV) (V) (a) (b) (c) (w) (x) (y)
Cycle: I II III IV V a b c w x y
The letters are somewhat smaller.
Primary: ((1)) ((2)) ((3)) ((4)) ((5)) ((A)) ((B)) ((C)) ((W)) ((X)) ((Y))
Intermediate: (1) (2) (3) (4) (5) (A) (B) (C) (W) (X) (Y)
Minor: 1 2 3 4 5 A B C W X Y
The letters are somewhat smaller.
Minute: ((i)) ((ii)) ((iii)) ((iv)) ((v)) ((a)) ((b)) ((c)) ((w)) ((x)) ((y))
Minutte: (i) (ii) (iii) (iv) (v) (a) (b) (c) (w) (x) (y)
Subminutte: i ii iii iv v a b c w x y
The Elliott Wave title is an Elliott Wave language for detecting cycles so that the analyst can detect the position of a wave within the overall market advance. Elliott recognized 9 degrees of waves starting from the Great Super Period level which is mainly in the weekly and monthly time frame up to the Subminuette level which is within hourly time. The above scheme is used in all EWF charts.
EWF = Eliot Bird Forecast.
The rise of the algorithmic business
The development of computer technology and the Internet is perhaps the most relevant progress shaping and characterizing the 21st century. The proliferation of algorithmic and PC-based trading creates a whole new category of traders who trade based purely on technical points, probabilities and statistics without the human emotional aspect. Moreover, these machines operate ultra-fast in seconds or even milliseconds buying and selling based on proprietary algorithms.
Undoubtedly, the trading environment we face today is quite different from that of the 1930s
We possess 4 primary classes of market: stock market, forex, commodities and bonds. 5 if we count cryptocurrencies or Blockchain.
The Elliott wave theory originally originated from the observation of the stock market (Dow's theory), but certain markets such as forex present a larger market.
In today's market, 5 wave moves still occur in the market, however our own years of observation suggest that a 3 wave move happens more frequently in the market than a 5 wave move. In addition, the market may continue to move in a corrective composition in the same direction. In other words, the market may trend in a corrective composite; it continues to move in 3-wave succession, getting a pullback, then continues in the same direction again in a 3-wave corrective move. Therefore, we believe in the present market, trends should not be in 5 waves and trends have the possibility of being realized in 3 waves. Therefore, it is critical not to force everything in 5 waves when trying to discover the trend and label the chart.
Fibonacci
Introduction
Leonardo Fibonacci da Pisa is a 13th century mathematician who found the Fibonacci sequence. In 1242, he published an article entitled Liber Abacci which introduced the decimal system. The basis of the work came from a 2-year analysis of the pyramids of Giza. Fibonacci is most successful for his Fibonacci Summation series that allowed the Old World during the 13th century to change from Roman numeration (XXIV = 24) to the Arabic numeration (24) that we use today. For his work in mathematics, Fibonacci received the equivalent of the present Nobel Prize.
Fibonacci Series
One of Leonardo Fibonacci's most famous discoveries is the Fibonacci Summation series. This series takes 0 and adds 1 as both first numbers. The successive numbers in the series add both previous numbers and thus we have 0, 1, 1, 1, 2, 3, 5, 8, 8, 13, 21, 21, 34, 55, 89 to infinity. The golden ratio (1.618) is received by dividing a Fibonacci number with another Fibonacci number earlier in the series. For example, 89 divided by 55 would yield 1,618.
Fibonacci interaction
They have the ability to produce numerous Fibonacci ratios in a table shown below, where one Fibonacci number (numerator) is divided by another Fibonacci number (denominator). Such ratios, and various other derivatives of them, appear in nature in every piece and in the financial markets. They commonly indicate levels at which intense resistance and support will be found. They are simply seen in nature (spirals of shells, flower petals, composition of tree branches, etc.), art, geometry, architecture and song.
Several of the key Fibonacci causes have the potential to be derived as follows:
- 0.618 is received by dividing any Fibonacci number in the sequence by another Fibonacci number that follows it fast. For example, 8 divided by 13 or 55 divided by 89.
- 0.382 is received by dividing any Fibonacci number in the sequence by another Fibonacci number that is 2 places to the right in the sequence. For example, 34 divided by 89
- 1.618 (Golden Ratio) is received by dividing any Fibonacci number in the sequence by another Fibonacci number that is 1 place to the left in the sequence. Exemplifying, 89 divided by 55, 144 divided by 89
Fibonacci Retracement and Expansion
The Fibonacci retracement in technical research and Elliott wave theory relates to a market correction (counter trend) that is expected to culminate at support or resistance zones indicated by key Fibonacci levels. The market is expected to turn and resume trending back in the primary direction.
The Fibonacci Expansion refers to the market moving with the overriding trend towards support and resistance zones at key Fibonacci levels where the target profit is measured. Traders use the Fibonacci Expansion to establish their profit target.
The list of relevant Fibonacci Retracement and Fibonacci Expansion ratios for the financial market is shown below:
Relationship between Fibonacci and Elliott wave theory
The Fibonacci ratio is useful for measuring the target of a wave's movement within an Elliott wave structure. The different waves in an Elliott wave structure are related to each other with the Fibonacci ratio. For example, in impulse wave:
- Wave 2 is usually 50%, 61.8%, 76.4% or 85.4% of wave 1.
- Wave 3 is usually 161.8% of wave 1.
- Wave 4 is usually 14.6%, 23.6% or 38.2% of wave 3.
- Wave 5 is usually inverse 1.236 - 1.618% of wave 4, equal to wave 1 or 61.8% of wave 1 + 3.
Therefore, traders can use the above information to determine the entry point and profit target when initiating a trade.
Motor waves
In Elliott wave theory, the traditional definition of a driving wave is a 5-wave movement in the same direction as the trend of a higher degree. There are three different variations of a 5-wave movement that is considered a driving wave: impulse wave, impulse with extension and diagonal.
EWF prefers to define the driving wave in a different way. We agree that the driving waves move in the same direction as the trend and we also agree that the 5-wave movement is a driving wave. However, we believe that the driving waves do not have to be in 5 waves. In today's market, the driving waves can develop in 3 waves. For this reason, we prefer to call it a motive sequence.
Impulse
• The promotion wave is subdivided into 5 waves. In Figure 2, the promotion displacement is subdivided into 1, 2, 3, 3, 4, 5 at a lower level.
• The subdivisions of waves 1, 3 and 5 are promotion. The subdivision in this situation is ((i)), ((ii)), (iii)), ((iv)) and ((v)) in minute degrees.
• Wave 2 cannot go back to the beginning of wave 1.
• Wave 3 could not be the shortest wave of the 3 waves of encouragement, that is, wave 1, 3 and 5.
• Wave 4 does not overlap with Wave 1 cost territory.
• Wave 5 should conclude with a divergence of promotion.
Relationship of Fibonacci interaction
• Wave 2 is 50%, 61.8%, 76.4%, or 85.4% of wave 1.
• Wave 3 is 161.8%, 200%, 261.8% or 323.6% of wave 1-2
• Wave 4 is 14.6%, 23.6% or 38.2% of wave 3, however, no more than 50%.
• There are 3 different ways to measure wave 5. First, wave 5 is a reverse retracement from 123.6 to 161.8% of wave 4.
Impulse with extension
Guidelines
• Impulses usually have an extension in one of the driving waves (either wave 1, 3 or 5).
• Extensions are elongated impulses with exaggerated subdivisions.
• Extensions frequently occur in the third wave in the stock market and the foreign exchange market. The commodity market commonly develops extensions in the fifth wave.
Diagonal
• Particular type of driving wave that arises as a subdivision of wave 1 in a zigzagging fomentation or subdivision of wave A.
• In Figure A, the primordial diagonal is a subdivision of wave 1 into a fomentation. In Figure B, the primordial diagonal is a subdivision of wave A in a zigzag.
• The primary diagonal is mainly characterized by the overlapping of waves 1 and 4 and also by the wedge shape, however the overlapping in the middle of waves 1 and 4 is not a condition, it may or may not occur.
• The subdivision of a primordial diagonal could be 5-3-5-3-5 or 3-3-3-3-3-3-3. The above examples present a primordial diagonal with subdivision 5-3-5-3-5-5.
A:
B:
Diagonal end
- Particular type of driving wave that arises as a subdivision of wave 5 in a fomentation or subdivision of wave C in a zigzag.
- In Figure A, the final diagonal is a subdivision of wave 5 into a fomentation. In Figure B, the final diagonal is a subdivision of wave C in a zigzag.
- The final diagonal is mainly characterized by the overlapping of waves 1 and 4 and also by the wedge shape. However, the overlapping in the middle of waves 1 and 4 is not a condition and may or may not happen.
- The subdivision of an end diagonal is 3-3-3-3-3-3-3 or 5-3-5-3-3-5.
A:
B:
Waves
Wave 1: In Elliott wave theory, wave one is occasionally obvious in its early stages. Once the first wave of a new bull market begins, the primary news is almost universally negative. The previous trend is still likely to be quite in place. Primary analysts continue to revise their earnings estimates downward; the economy arguably does not look deep. Sentiment surveys are decidedly bearish, trading prospects remain in vogue, and implied volatility in the prospects market is high. Volume may pick up a bit as costs rise, but not enough to alert many technical analysts.
Wave 2: In Elliott wave theory, wave 2 corrects wave one, however, it can never extend beyond the starting point of wave one. Commonly, the news remains bad. As costs retest the previous low, the bearish emotion becomes immediate and "the crowd" arrogantly reminds everyone that the bear market is still deeply seated. Still in this way, certain positive signs appear for those who remain watching: volume must be lower along wave 2 than along wave one, costs primarily do not retrace more than 61.8% (see Fibonacci part below) of wave one earnings, and costs have to fall in a 3-wave chief
Wave 3: In Elliott wave theory, wave 3 is often the largest and most powerful wave of a trend (although several inquiries suggest that in commodity markets, wave 5 is the largest). The news is now positive and mainstream analysts begin to increase earnings estimates. Costs rise immediately, corrections are brief and shallow. Anyone looking to "enter a pullback" is likely to miss the boat. As the third wave begins, the news is likely to continue to be bearish, and most market players remain negative; however, at the midpoint of the third wave, "the crowd" will steadily join the new uptrend. Wave 3 consistently extends wave one by an amount of 1,618:1.
The Wave 3 rally gains momentum and takes the top of Wave 1. As soon as the top of Wave 1 is exceeded, the stops are removed. Depending on the number of stops, gaps are left open. The gaps are a good indication that a Wave 3 is developing. After clearing the stops, the Wave 3 rally has caught the attention of traders.
Finally, from wave 4, more buying sets in and costs begin to rise again. The fourth wave is often precisely corrective. Costs have the potential to meander sideways over an extended time frame, and wave 4 typically retraces less than 38.2% of wave 3. Volume is well below that of wave 3. This is an optimal place to trade a pullback if you understand the future potential of wave 5. Still, fourth waves tend to be frustrating thanks to their lack of development in the broader trend.
Wave 5: In Elliott wave theory, wave 5 is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is optimistic. Unfortunately, in other words, once several average investors at the end buy, just prior to the top. Volume is often lower in the fifth wave than in the third, and various momentum indicators begin to diverge (costs reach a new high, but indicators do not reach a new peak). Finally, from a fundamental bull market, the bears have the potential to be ridiculed (remember how forecasts of a stock market top have been accepted throughout 2000).
Wave 5 lacks the great excitement and strength that is in the wave 3 rally. The progress of wave 5 is triggered by a tiny set of traders. Even when costs reach a new high above the preeminent part of wave 3, the rate of power or strength within the wave 5 development is quite small compared to the progress of wave 3.
Wave A: corrections are usually more difficult to detect than impulsive movements. In wave A of a bear market, the primary news is usually positive. Most analysts see the decline as a correction in a still active bull market. Certain technical indicators accompanying wave A include higher volume, an increase in implied volatility in the possibility markets and probably an increase in open interest in the futures markets involved.
Wave B: Costs reverse to the upside, which many see as a resumption of the now defunct bull market. Those familiar with traditional technical research are likely to see the peak as the right shoulder of a head-and-shoulders reversal top. The volume along wave B should be lower than in wave A. At this point, it is possible that the fundamentals may not be perfecting at the moment, however, most likely they have not yet turned negative.
Wave C: Costs fall impulsively in 5 waves. Volume picks up and, by the third leg of wave C, almost the entire planet realizes that a bear market is firmly entrenched. Wave C is often at least as huge as wave A and consistently extends to 1,618 times wave A or more.
Corrective waves
The traditional definition of corrective waves is waves that move against the trend of a larger level. Corrective waves have much more diversity and are less identifiable compared to building waves. Sometimes it may be quite difficult to detect corrective patterns until they are completed. However, as we have explained before, both trend and counter trend have the potential to be realized in a corrective head in today's market, especially in the forex market. Corrective waves are possibly best defined as waves that move in 3, however, never in 5. Only driving waves are 5.
There are 5 types of corrective patterns:
Zigzag (5-3-5)
Flat (3-3-5)
Triangle (3-3-3-3-3-3-3)
Double 3: a conjunction of both previous corrective patterns
Triple 3: a mixture of the 3 previous corrective patterns
Zigzag:
• Zigzag is a 3-wave corrective composition labeled as ABC.
• The subdivision of wave A and C is 5 waves, either fomentation or diagonal.
• Wave B could be any corrective composition
• The zigzag is a 5-3-5 composition.
Fibonacci Interaction Ratio
• Wave B = 50%, 61.8%, 76.4% or 85.4% of wave A
• Wave C = 61.8%, 100% or 123.6% of Wave A
• If wave C = 161.8% of wave A, wave C could be wave 3 of a 5-wave promotion. Therefore, one way of labeling between ABC and promotion is whether or not the third swing has expansion.
Map
A flat correction is a 3-wave corrective move labeled ABC. Although the labeling is the same, the flat differs from the zigzag in the subdivision of the A wave. While the zigzag is a 5-3-5 structure, the flat is a 3-3-5 structure. There are three different types of Flats: Regular, Irregular / Expanded and Running Flats.
A 3-wave corrective shift labeled as ABC
• The subdivision of wave A and B is in 3 waves
• The subdivision of wave C is into 5 waves fomentation / diagonal
• The subdivision of wave A and B can be in any 3-wave corrective composition, including zigzag, flat, double 3, triple 3, triple 2, triple 3 and triple 3.
• Wave B ends near the beginning of wave A.
• Wave C mainly ends a little beyond the end of wave A.
• Wave C is required to have divergence of promotion
Fibonacci Interaction Ratio
• Wave B = 90% of wave A
• Wave C = 61.8%, 100% or 123.6% of wave AB
Enlarged floors
• A 3-wave corrective shift labeled as ABC
• The subdivision of wave A and B is in 3 waves
• The subdivision of wave C is into 5 waves fomentation / diagonal
• The subdivision of wave A and B can be in any 3-wave corrective composition, including zigzag, flat, double 3, triple 3, triple 2, triple 3 and triple 3.
• The B wave of the 3-3-5 boss ends beyond the initial degree of the A wave.
• Wave C ends substantially beyond the final degree of wave A.
• Wave C is required to have divergence of promotion
Fibonacci Interaction Ratio
• Wave B = 123.6% of wave A
• Wave C = 123.6% - 161.8% of wave AB
Running floors
• A 3-wave corrective shift labeled as ABC
• The subdivision of wave A and B is in 3 waves
• The subdivision of wave C is into 5 waves fomentation / diagonal
• The subdivision of wave A and B can be in any 3-wave corrective composition, including zigzag, flat, double 3, triple 3, triple 2, triple 3 and triple 3.
• The B wave of the 3-3-5 boss ends substantially beyond the initial degree of the A wave as in an expanded plane.
• Wave C does not travel the full distance, remaining below the degree where wave A ended.
• Wave C is required to have divergence of promotion
Fibonacci Interaction Ratio
• Wave B = 123.6% of wave A
• Wave C = 61.8% - 100% of wave AB
Chart Original:
Ralph Elliott based his approach on the behavior of traders. He believed that traders and investors repeated the same actions. Therefore, the market highs and lows can be easily predicted. Elliott Wave Theory is based on the behavior of traders.
Vital principle of the Elliott wave theory of the 1930s.
The way it works is as follows: An 'Impulse Wave' (typically derived from a main trend) always shows five other waves within its pattern. In turn, each wave in that pattern also shows five more waves within it. The pattern repeats endlessly.
The Pattern
Costs alternate between an impulsive or driving phase and a corrective phase on each of the trend timescales. The impulses are constantly divided into a group of 5 lower level waves, which in turn alternate between motor and corrective character, with waves 1, 3 and 5 being pulses and waves 2 and 4 being small setbacks of waves 1 and 3.
Waves 1, 3, and 5 remain pulsating and are broken down into 5 subordinate pulses labeled ((i)), (ii)), (iii)), ((iv)), and ((v)). Waves 2 and 4 are corrective waves and are divided into 3 subordinate waves labeled ((a)), (b)) and ((c)). The 5 shafts that move in shafts 1, 2, 3, 3, 4 and 5 form a higher drive shaft (1).
Corrective waves are divided into 3 lower level waves called ABC. Corrective waves begin with a 5-wave counter-trend promotion (wave A), a retracement (wave B) and another promotion (wave C). The 3 waves A, B and C form a higher level correction wave (2).
In a bear market, the prevailing trend is down, so the head is reversed: 5 waves down and 3 waves up.
Eliot Easy:
Eliot Chart:
SuperMilenium: (1) 2) (3) (4) (5) (A) (B) (C) (W) (X) (Y)
Millennium: (1) (2) (3) (4) (5) (A) (B) (C) (W) (X) (Y)
SubMilenio: 1 2 3 4 5 A B C W X Y
Grand Super Cycle: ((I)) ((II)) ((III)) ((IV)) ((V)) ((a)) ((b)) ((c)) ((w)) ((x)) ((y))
Super Cycle: (I) (II) (III) (IV) (V) (a) (b) (c) (w) (x) (y)
Cycle: I II III IV V a b c w x y
The letters are somewhat smaller.
Primary: ((1)) ((2)) ((3)) ((4)) ((5)) ((A)) ((B)) ((C)) ((W)) ((X)) ((Y))
Intermediate: (1) (2) (3) (4) (5) (A) (B) (C) (W) (X) (Y)
Minor: 1 2 3 4 5 A B C W X Y
The letters are somewhat smaller.
Minute: ((i)) ((ii)) ((iii)) ((iv)) ((v)) ((a)) ((b)) ((c)) ((w)) ((x)) ((y))
Minutte: (i) (ii) (iii) (iv) (v) (a) (b) (c) (w) (x) (y)
Subminutte: i ii iii iv v a b c w x y
The Elliott Wave title is an Elliott Wave language for detecting cycles so that the analyst can detect the position of a wave within the overall market advance. Elliott recognized 9 degrees of waves starting from the Great Super Period level which is mainly in the weekly and monthly time frame up to the Subminuette level which is within hourly time. The above scheme is used in all EWF charts.
EWF = Eliot Bird Forecast.
The rise of the algorithmic business
The development of computer technology and the Internet is perhaps the most relevant progress shaping and characterizing the 21st century. The proliferation of algorithmic and PC-based trading creates a whole new category of traders who trade based purely on technical points, probabilities and statistics without the human emotional aspect. Moreover, these machines operate ultra-fast in seconds or even milliseconds buying and selling based on proprietary algorithms.
Undoubtedly, the trading environment we face today is quite different from that of the 1930s
We possess 4 primary classes of market: stock market, forex, commodities and bonds. 5 if we count cryptocurrencies or Blockchain.
The Elliott wave theory originally originated from the observation of the stock market (Dow's theory), but certain markets such as forex present a larger market.
In today's market, 5 wave moves still occur in the market, however our own years of observation suggest that a 3 wave move happens more frequently in the market than a 5 wave move. In addition, the market may continue to move in a corrective composition in the same direction. In other words, the market may trend in a corrective composite; it continues to move in 3-wave succession, getting a pullback, then continues in the same direction again in a 3-wave corrective move. Therefore, we believe in the present market, trends should not be in 5 waves and trends have the possibility of being realized in 3 waves. Therefore, it is critical not to force everything in 5 waves when trying to discover the trend and label the chart.
Fibonacci
Introduction
Leonardo Fibonacci da Pisa is a 13th century mathematician who found the Fibonacci sequence. In 1242, he published an article entitled Liber Abacci which introduced the decimal system. The basis of the work came from a 2-year analysis of the pyramids of Giza. Fibonacci is most successful for his Fibonacci Summation series that allowed the Old World during the 13th century to change from Roman numeration (XXIV = 24) to the Arabic numeration (24) that we use today. For his work in mathematics, Fibonacci received the equivalent of the present Nobel Prize.
Fibonacci Series
One of Leonardo Fibonacci's most famous discoveries is the Fibonacci Summation series. This series takes 0 and adds 1 as both first numbers. The successive numbers in the series add both previous numbers and thus we have 0, 1, 1, 1, 2, 3, 5, 8, 8, 13, 21, 21, 34, 55, 89 to infinity. The golden ratio (1.618) is received by dividing a Fibonacci number with another Fibonacci number earlier in the series. For example, 89 divided by 55 would yield 1,618.
Fibonacci interaction
They have the ability to produce numerous Fibonacci ratios in a table shown below, where one Fibonacci number (numerator) is divided by another Fibonacci number (denominator). Such ratios, and various other derivatives of them, appear in nature in every piece and in the financial markets. They commonly indicate levels at which intense resistance and support will be found. They are simply seen in nature (spirals of shells, flower petals, composition of tree branches, etc.), art, geometry, architecture and song.
Several of the key Fibonacci causes have the potential to be derived as follows:
- 0.618 is received by dividing any Fibonacci number in the sequence by another Fibonacci number that follows it fast. For example, 8 divided by 13 or 55 divided by 89.
- 0.382 is received by dividing any Fibonacci number in the sequence by another Fibonacci number that is 2 places to the right in the sequence. For example, 34 divided by 89
- 1.618 (Golden Ratio) is received by dividing any Fibonacci number in the sequence by another Fibonacci number that is 1 place to the left in the sequence. Exemplifying, 89 divided by 55, 144 divided by 89
Fibonacci Retracement and Expansion
The Fibonacci retracement in technical research and Elliott wave theory relates to a market correction (counter trend) that is expected to culminate at support or resistance zones indicated by key Fibonacci levels. The market is expected to turn and resume trending back in the primary direction.
The Fibonacci Expansion refers to the market moving with the overriding trend towards support and resistance zones at key Fibonacci levels where the target profit is measured. Traders use the Fibonacci Expansion to establish their profit target.
The list of relevant Fibonacci Retracement and Fibonacci Expansion ratios for the financial market is shown below:
Relationship between Fibonacci and Elliott wave theory
The Fibonacci ratio is useful for measuring the target of a wave's movement within an Elliott wave structure. The different waves in an Elliott wave structure are related to each other with the Fibonacci ratio. For example, in impulse wave:
- Wave 2 is usually 50%, 61.8%, 76.4% or 85.4% of wave 1.
- Wave 3 is usually 161.8% of wave 1.
- Wave 4 is usually 14.6%, 23.6% or 38.2% of wave 3.
- Wave 5 is usually inverse 1.236 - 1.618% of wave 4, equal to wave 1 or 61.8% of wave 1 + 3.
Therefore, traders can use the above information to determine the entry point and profit target when initiating a trade.
Motor waves
In Elliott wave theory, the traditional definition of a driving wave is a 5-wave movement in the same direction as the trend of a higher degree. There are three different variations of a 5-wave movement that is considered a driving wave: impulse wave, impulse with extension and diagonal.
EWF prefers to define the driving wave in a different way. We agree that the driving waves move in the same direction as the trend and we also agree that the 5-wave movement is a driving wave. However, we believe that the driving waves do not have to be in 5 waves. In today's market, the driving waves can develop in 3 waves. For this reason, we prefer to call it a motive sequence.
Impulse
• The promotion wave is subdivided into 5 waves. In Figure 2, the promotion displacement is subdivided into 1, 2, 3, 3, 4, 5 at a lower level.
• The subdivisions of waves 1, 3 and 5 are promotion. The subdivision in this situation is ((i)), ((ii)), (iii)), ((iv)) and ((v)) in minute degrees.
• Wave 2 cannot go back to the beginning of wave 1.
• Wave 3 could not be the shortest wave of the 3 waves of encouragement, that is, wave 1, 3 and 5.
• Wave 4 does not overlap with Wave 1 cost territory.
• Wave 5 should conclude with a divergence of promotion.
Relationship of Fibonacci interaction
• Wave 2 is 50%, 61.8%, 76.4%, or 85.4% of wave 1.
• Wave 3 is 161.8%, 200%, 261.8% or 323.6% of wave 1-2
• Wave 4 is 14.6%, 23.6% or 38.2% of wave 3, however, no more than 50%.
• There are 3 different ways to measure wave 5. First, wave 5 is a reverse retracement from 123.6 to 161.8% of wave 4.
Impulse with extension
Guidelines
• Impulses usually have an extension in one of the driving waves (either wave 1, 3 or 5).
• Extensions are elongated impulses with exaggerated subdivisions.
• Extensions frequently occur in the third wave in the stock market and the foreign exchange market. The commodity market commonly develops extensions in the fifth wave.
Diagonal
• Particular type of driving wave that arises as a subdivision of wave 1 in a zigzagging fomentation or subdivision of wave A.
• In Figure A, the primordial diagonal is a subdivision of wave 1 into a fomentation. In Figure B, the primordial diagonal is a subdivision of wave A in a zigzag.
• The primary diagonal is mainly characterized by the overlapping of waves 1 and 4 and also by the wedge shape, however the overlapping in the middle of waves 1 and 4 is not a condition, it may or may not occur.
• The subdivision of a primordial diagonal could be 5-3-5-3-5 or 3-3-3-3-3-3-3. The above examples present a primordial diagonal with subdivision 5-3-5-3-5-5.
A:
B:
Diagonal end
- Particular type of driving wave that arises as a subdivision of wave 5 in a fomentation or subdivision of wave C in a zigzag.
- In Figure A, the final diagonal is a subdivision of wave 5 into a fomentation. In Figure B, the final diagonal is a subdivision of wave C in a zigzag.
- The final diagonal is mainly characterized by the overlapping of waves 1 and 4 and also by the wedge shape. However, the overlapping in the middle of waves 1 and 4 is not a condition and may or may not happen.
- The subdivision of an end diagonal is 3-3-3-3-3-3-3 or 5-3-5-3-3-5.
A:
B:
Waves
Wave 1: In Elliott wave theory, wave one is occasionally obvious in its early stages. Once the first wave of a new bull market begins, the primary news is almost universally negative. The previous trend is still likely to be quite in place. Primary analysts continue to revise their earnings estimates downward; the economy arguably does not look deep. Sentiment surveys are decidedly bearish, trading prospects remain in vogue, and implied volatility in the prospects market is high. Volume may pick up a bit as costs rise, but not enough to alert many technical analysts.
Wave 2: In Elliott wave theory, wave 2 corrects wave one, however, it can never extend beyond the starting point of wave one. Commonly, the news remains bad. As costs retest the previous low, the bearish emotion becomes immediate and "the crowd" arrogantly reminds everyone that the bear market is still deeply seated. Still in this way, certain positive signs appear for those who remain watching: volume must be lower along wave 2 than along wave one, costs primarily do not retrace more than 61.8% (see Fibonacci part below) of wave one earnings, and costs have to fall in a 3-wave chief
Wave 3: In Elliott wave theory, wave 3 is often the largest and most powerful wave of a trend (although several inquiries suggest that in commodity markets, wave 5 is the largest). The news is now positive and mainstream analysts begin to increase earnings estimates. Costs rise immediately, corrections are brief and shallow. Anyone looking to "enter a pullback" is likely to miss the boat. As the third wave begins, the news is likely to continue to be bearish, and most market players remain negative; however, at the midpoint of the third wave, "the crowd" will steadily join the new uptrend. Wave 3 consistently extends wave one by an amount of 1,618:1.
The Wave 3 rally gains momentum and takes the top of Wave 1. As soon as the top of Wave 1 is exceeded, the stops are removed. Depending on the number of stops, gaps are left open. The gaps are a good indication that a Wave 3 is developing. After clearing the stops, the Wave 3 rally has caught the attention of traders.
Finally, from wave 4, more buying sets in and costs begin to rise again. The fourth wave is often precisely corrective. Costs have the potential to meander sideways over an extended time frame, and wave 4 typically retraces less than 38.2% of wave 3. Volume is well below that of wave 3. This is an optimal place to trade a pullback if you understand the future potential of wave 5. Still, fourth waves tend to be frustrating thanks to their lack of development in the broader trend.
Wave 5: In Elliott wave theory, wave 5 is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is optimistic. Unfortunately, in other words, once several average investors at the end buy, just prior to the top. Volume is often lower in the fifth wave than in the third, and various momentum indicators begin to diverge (costs reach a new high, but indicators do not reach a new peak). Finally, from a fundamental bull market, the bears have the potential to be ridiculed (remember how forecasts of a stock market top have been accepted throughout 2000).
Wave 5 lacks the great excitement and strength that is in the wave 3 rally. The progress of wave 5 is triggered by a tiny set of traders. Even when costs reach a new high above the preeminent part of wave 3, the rate of power or strength within the wave 5 development is quite small compared to the progress of wave 3.
Wave A: corrections are usually more difficult to detect than impulsive movements. In wave A of a bear market, the primary news is usually positive. Most analysts see the decline as a correction in a still active bull market. Certain technical indicators accompanying wave A include higher volume, an increase in implied volatility in the possibility markets and probably an increase in open interest in the futures markets involved.
Wave B: Costs reverse to the upside, which many see as a resumption of the now defunct bull market. Those familiar with traditional technical research are likely to see the peak as the right shoulder of a head-and-shoulders reversal top. The volume along wave B should be lower than in wave A. At this point, it is possible that the fundamentals may not be perfecting at the moment, however, most likely they have not yet turned negative.
Wave C: Costs fall impulsively in 5 waves. Volume picks up and, by the third leg of wave C, almost the entire planet realizes that a bear market is firmly entrenched. Wave C is often at least as huge as wave A and consistently extends to 1,618 times wave A or more.
Corrective waves
The traditional definition of corrective waves is waves that move against the trend of a larger level. Corrective waves have much more diversity and are less identifiable compared to building waves. Sometimes it may be quite difficult to detect corrective patterns until they are completed. However, as we have explained before, both trend and counter trend have the potential to be realized in a corrective head in today's market, especially in the forex market. Corrective waves are possibly best defined as waves that move in 3, however, never in 5. Only driving waves are 5.
There are 5 types of corrective patterns:
Zigzag (5-3-5)
Flat (3-3-5)
Triangle (3-3-3-3-3-3-3)
Double 3: a conjunction of both previous corrective patterns
Triple 3: a mixture of the 3 previous corrective patterns
Zigzag:
• Zigzag is a 3-wave corrective composition labeled as ABC.
• The subdivision of wave A and C is 5 waves, either fomentation or diagonal.
• Wave B could be any corrective composition
• The zigzag is a 5-3-5 composition.
Fibonacci Interaction Ratio
• Wave B = 50%, 61.8%, 76.4% or 85.4% of wave A
• Wave C = 61.8%, 100% or 123.6% of Wave A
• If wave C = 161.8% of wave A, wave C could be wave 3 of a 5-wave promotion. Therefore, one way of labeling between ABC and promotion is whether or not the third swing has expansion.
Map
A flat correction is a 3-wave corrective move labeled ABC. Although the labeling is the same, the flat differs from the zigzag in the subdivision of the A wave. While the zigzag is a 5-3-5 structure, the flat is a 3-3-5 structure. There are three different types of Flats: Regular, Irregular / Expanded and Running Flats.
A 3-wave corrective shift labeled as ABC
• The subdivision of wave A and B is in 3 waves
• The subdivision of wave C is into 5 waves fomentation / diagonal
• The subdivision of wave A and B can be in any 3-wave corrective composition, including zigzag, flat, double 3, triple 3, triple 2, triple 3 and triple 3.
• Wave B ends near the beginning of wave A.
• Wave C mainly ends a little beyond the end of wave A.
• Wave C is required to have divergence of promotion
Fibonacci Interaction Ratio
• Wave B = 90% of wave A
• Wave C = 61.8%, 100% or 123.6% of wave AB
Enlarged floors
• A 3-wave corrective shift labeled as ABC
• The subdivision of wave A and B is in 3 waves
• The subdivision of wave C is into 5 waves fomentation / diagonal
• The subdivision of wave A and B can be in any 3-wave corrective composition, including zigzag, flat, double 3, triple 3, triple 2, triple 3 and triple 3.
• The B wave of the 3-3-5 boss ends beyond the initial degree of the A wave.
• Wave C ends substantially beyond the final degree of wave A.
• Wave C is required to have divergence of promotion
Fibonacci Interaction Ratio
• Wave B = 123.6% of wave A
• Wave C = 123.6% - 161.8% of wave AB
Running floors
• A 3-wave corrective shift labeled as ABC
• The subdivision of wave A and B is in 3 waves
• The subdivision of wave C is into 5 waves fomentation / diagonal
• The subdivision of wave A and B can be in any 3-wave corrective composition, including zigzag, flat, double 3, triple 3, triple 2, triple 3 and triple 3.
• The B wave of the 3-3-5 boss ends substantially beyond the initial degree of the A wave as in an expanded plane.
• Wave C does not travel the full distance, remaining below the degree where wave A ended.
• Wave C is required to have divergence of promotion
Fibonacci Interaction Ratio
• Wave B = 123.6% of wave A
• Wave C = 61.8% - 100% of wave AB
Chart Original:
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