Understanding Elliott Wave Theory

Feb 17, 2025

Elliott Wave Tutorial

Introduction

  • Elliott Wave Theory: A method to predict price movements in financial markets by identifying repeated wave patterns.
  • Two general types of waves:
    • Impulse Wave: Five legs in the direction of the trend.
    • Correction Wave: Three legs in the opposite direction (A, B, C).

Impulse Waves

  • Moves in the direction of the trend.
  • Consists of five waves (1, 2, 3, 4, 5).
  • Wave 1: Initial wave in the direction of the trend.

Key Rules for Impulse Waves

  1. Wave 2 cannot retrace more than 100% of Wave 1.
    • Typical retracement: 61.8% (Fibonacci level).
  2. Wave 3 cannot be the shortest wave.
    • Usually the longest; at least a 1.618 extension of Wave 1.
  3. Wave 4 cannot overlap with Wave 1 (except for diagonal patterns).
    • Typical retracement: 38.2% of Wave 3.

Wave 5 Projection

  • Use Fibonacci extension of Waves 0 to 3.
  • Common extension: 0.618 of Wave 0 to 3.
  • Alternative extensions: 0.786 or very extended.

Correction Waves

  • Oppose the trend direction.
  • Retracement with typically lower volume.
  • Example: Zigzag Pattern (ABC)
    • A = Initial corrective move.
    • B = Counter move, often corrective.
    • C = Completion of the correction, typically matches A in length.

Fractal Nature of Waves

  • Each wave is composed of smaller impulse and corrective waves.
  • Example: Wave 1 is an impulse wave made of smaller 1-2-3-4-5 pattern.

Diagonal Patterns

  • An exception where Wave 4 may overlap Wave 1.
  • Generally rare and not to be relied upon in trading.

Impulse vs. Correction Waves

  • Impulse Waves: Move with higher volume in trend direction.
  • Correction Waves: Move with lower volume against the trend.

Fibonacci Levels

  • Used to project retracement and extension levels.
  • Important for predicting the end of waves.

Conclusion

  • Understanding the Elliott Wave requires recognizing patterns and applying rules.
  • Correctly identifying wave patterns is crucial to trading success.
  • Elliott Wave combined with other tools like volume analysis and Fibonacci levels can be powerful.
  • Future videos will explore deeper into variants of corrective waves and further technical analysis.