Understanding Elliott Wave Theory

Hi guys, this is wave 618 and this is a tutorial on Elliott wave. So we're going to start with the very basics about Elliott wave here. Now, there's two general types of wave for Elliott wave. So the two types are impulse wave. So this is your impulse wave. As you can see, there's five legs up. So there's one, two, three, four, five. Whilst in a correction wave, We often see this three legs down which is A, B, C. Now there are numerous variants of a correction wave, okay? But for the sake of simplicity in this video, we're going to be focusing more on what a correction wave looks like rather than all the specific details about the differences in correction waves which will be covered in another video. For the sake of this video, I want to demonstrate that the impulse wave moves in the general direction of the trend, whilst the correction wave is then a pullback. So if you can imagine, if we're trending upwards, you'll see a five legs up, followed by three legs down, followed by five legs up, followed by three waves down, followed by five legs up. This is a pattern that repeats itself as the trend is developing. Now, in order to... determine where price is going to project to we use Fibonacci levels. So once we've seen this wave one form we're then looking for a wave two. So how do we determine where wave two will finish? Well what we can do is we can do a Fibonacci retracement and typically the most classic scenario is wave 2 will certainly go beyond the 50% retracement and very often it will end at the 61.8% retracement. However, it can retrace further and I will refer to these rules at the top here in a moment. The only rule with regards to wave 2 is that it can't retrace more than 100% of wave 1, so it can't come down here, that's not possible. That would invalidate the... the entire move. So let's just plot it there at the 61.8 because as I say that's a very classical retracement level. Then wave three is typically the the longest leg in the the impulse wave. However it doesn't have to be the longest. Wave one or wave five could be the longest but it's important that wave three is not the shortest wave. If wave three is the shortest then then the move is invalidated. That's another one of our rules. As we can see here, the rule number three was the one we discussed first actually. So wave two cannot retrace more than 100% of wave one. So typically it's a 61.8% retracement. And then rule two was wave three cannot be the shortest wave. Now after wave three, we have wave four. Now typically with wave 4 the retracement is not as deep as wave 2. So let's just delete that fib retracement there and now we'll plot a new one. So in order to determine where wave 4 will go down to, we start from the beginning of wave 3 which is at this level here. We do a fib retracement from the top of wave 3 down. you can see the wave 4 is already plotted quite nicely at this 38.2 retracement. This is typically where it will retrace to. Technically wave 4 can come down to any level providing it doesn't cross with wave 1. For example here wave 4 is crossing with wave 1 which means it's no longer an impulse wave. As per the rule number one here wave four cannot overlap wave one. Now there is one exception to that and that's in a pattern called a diagonal which is another type of impulse wave where the waves do overlap like this. However this is quite a rare finding and so I would never assume that we're in a wave like that in trading because the probability of it being The case is very low. If you see overlapping waves like this, it's more likely a corrective wave. Yeah, anyway, wave falls typically retrace the 38.2. You very often see them come to 50% also, but 38.2 is the most common. Now wave 5, the way I usually like to project wave 5 is I do a Fibonacci extension of waves 0 to 3. So if this is wave 0 here, this is the genesis of the entire impulse move, and we do a Fib extension of 0 to 3. and extend that from the retracement of wave 4, wave 5 will typically come to the 0.618 extension of waves 0 to 3. Now 0.786 is also another common place for wave 5 to finish, however I'll leave it here. because this is the most common, the 0.618 extension of wave zero to three. So this is our classical, oh dear, this is our classical impulse wave right here, five waves up, and the reason wave two retraces a lot is because at this stage, the move has not established itself. So there's not, the balls aren't as confident at this stage as they are. later in the impulse move and that's why you see a deep retracement the bears are still trying to take control of this market but after that you get a strong impulse wave three and then the bulls are taking over they're feeling more confident and that's why wave four is a more shallow retracement as i say it's typically a 38.2 retracement of the wave three and then you see this final wave five up now if wave three is not extended As I say, wave 3 is usually the longest wave, but if it's not, if it's for example similar to the length of wave 1, then you can expect the next wave, wave 5, to be extended. In terms of how far wave 3 will go, the best way to determine that is to do a fib extension, and it's typically a 1.618 extension of wave 1. So if this is our wave 1 and we extend that from the beginning of wave 3, wave 3 would come up to here This 1.618 is a typical extension. Yeah, however, it could be the 1.382 1.236 or the 1 yeah, these can all get hit most commonly at this level after that Another common extension is 2.618 or 4.236 This one, not so often, the 3.618. The next common, as I say, the most common is 2.618 and then the 4.236. This is a very hyper-extended wave 3, yeah? But you do see it when there's a lot of hysteria within the market. You will see these really extended waves. So when you do see these really extended waves and you're looking for where it may retrace, you should look out for these Fibonacci levels, typically the 4.236. Right, so and as I say wave 5 is a Typically a 0.618 extension of wave 0 to 3. Yeah, so that's our impulse wave right there now After you've seen five legs up you can expect to see a correction wave There's many many different waves of correction patterns and in this video I'm only going to talk about a zigzag, which is what I've drawn here. Yeah, we call this an ABC zigzag And most typically in a zigzag, A wave will be equal to C wave. Okay? So if we do a fib extension, if this is our A wave, C typically is a one-to-one extension. So it would finish there. Now, One of the most important things to understand about Elliott Wave is we see what's called fractals. So this impulsive wave is made up of both impulsive and corrective waves. So wave 1 is an impulse wave, wave 2 is a corrective wave, wave 3 is an impulse wave, wave 4 corrective, wave 5 impulsive. So basically the waves going up in the direction of trend are considered impulse waves and the waves that are retracing are called corrective waves. So if we were to draw sub waves of these you would draw something like this one, two, three, four, five and then the retracement would be like a, b, c. yeah this is how you would do the sub wave count and again for wave three you would see five legs up so you see one two three four five and you get the picture this would be three legs down and this would be another five legs up okay likewise with a zigzag yeah Now as I say there's lots of variations but in the case of a zigzag you get an impulse down, then a corrective wave and then another impulse wave down. So this would be five waves down, one, two, three, four, five. The B leg would be corrective so it's A, B, C. and then you'd get another impulse down in the sea leg one two three four five okay so that's what you can expect from a fractal point of view likewise on a larger degree if we okay We could say this is all part of a larger wave one up to here because we've had five waves up the correction the ABC is wave two and then we see wave three there's not enough space to draw this but wave three would be right up here wave four and wave five even higher yeah so this is the fractal aspect to Elliott Wave that we see on every time level. You'll see it on the one minute chart, you'll see it on the weekly chart, the monthly chart. These patterns will be there to see. Now these are the very regularly drawn Elliott Wave patterns and it's not always that easy to interpret unfortunately. And it does take a lot of experience and screen time to get used to seeing these patterns. But this is the general gist of it. In this video I want to illustrate the difference between an impulse wave and a correction wave. In further videos I'll be describing all the different types of correction wave. Impulse waves are typically looking like this. However, you can get what's called a diagonal. And a diagonal, I'll explain in detail what happens with a diagonal in another video. But basically, it starts to look very corrective rather than... like an impulse. Wave four overlaps wave one which makes everyone think it can't be an impulse wave and then yeah you'll get a picture something like that okay so that however I won't go into that in this video so this is your typical five waves up and you get your three legs down correction pattern This is in an uptrend obviously if it was down trending you'd see the opposite You'd see these five legs down and then three legs up So for example if price was coming down one two three four five You then see a retracement like this a B C. I'm sorry That was a rather deep retracement there. But yeah, you'd see a retracement like that before seeing the next big wave down here. So impulse waves move in the direction of the trend whilst correction waves move in the direction against the trend. Typically you see the highest volume on the wave 3. The impulse waves generally have more volume whilst you'll see falling volume within the correction waves, for example wave 2. or wave 4 and the ABC pattern will again have much less volume than the impulse wave and Obviously on a lower degree. This is an impulse wave down so that will have more volume than this correction wave up and then again you'll see higher volume in this impulse wave down. Yeah so that's the the general aspect to Elliott wave. Here are your three rules, these are the only rules regarding Elliott wave. Yeah so I think that sums up just a little bit about what an impulse and a corrective wave are. As I say impulse waves there's only one main variance, it looks like this. Obviously there's different flip extension levels as I mentioned all the different levels that wave 3 could go to Which will change how extended the wave looks but it will still apply to these three rules no matter what Except in the case of a diagonal which as I say is rare and you should never bet on being in a diagonal pattern Correction waves will go into a lot more detail with because there's a lot of different variants And this is the key to understanding Elliott wave Once a corrective wave has finished you can expect an explosive move out and you have to fully understand all the variants of correction waves before you can capitalize on that because very often you can think that you're in a correction wave that's finished and all of a sudden you find out it's forming a more complex correction wave and this is what catches traders out time and time again. This is when people lose faith in Elliott Wave and say that it's nonsense. And yeah, for me, Elliott Wave is very, very profitable. It's a huge aspect to my technical analysis. And combined with other indicators, particularly Fibonacci levels and volume, momentum divergence, it's a very powerful indicator. So I'll leave it at that in this video, but I look forward to further videos, further in-depth videos on Elliott Wave, where we'll explore Elliott Wave technical analysis in more detail. Alright, I'll leave it at that.

As you can see, there's five legs up. So there's one, two, three, four, five. Whilst in a correction wave, We often see this three legs down which is A, B, C. Now there are numerous variants of a correction wave, okay?

But for the sake of simplicity in this video, we're going to be focusing more on what a correction wave looks like rather than all the specific details about the differences in correction waves which will be covered in another video. For the sake of this video, I want to demonstrate that the impulse wave moves in the general direction of the trend, whilst the correction wave is then a pullback. So if you can imagine, if we're trending upwards, you'll see a five legs up, followed by three legs down, followed by five legs up, followed by three waves down, followed by five legs up.

This is a pattern that repeats itself as the trend is developing. Now, in order to... determine where price is going to project to we use Fibonacci levels.

So once we've seen this wave one form we're then looking for a wave two. So how do we determine where wave two will finish? Well what we can do is we can do a Fibonacci retracement and typically the most classic scenario is wave 2 will certainly go beyond the 50% retracement and very often it will end at the 61.8% retracement. However, it can retrace further and I will refer to these rules at the top here in a moment. The only rule with regards to wave 2 is that it can't retrace more than 100% of wave 1, so it can't come down here, that's not possible.

That would invalidate the... the entire move. So let's just plot it there at the 61.8 because as I say that's a very classical retracement level. Then wave three is typically the the longest leg in the the impulse wave.

However it doesn't have to be the longest. Wave one or wave five could be the longest but it's important that wave three is not the shortest wave. If wave three is the shortest then then the move is invalidated.

That's another one of our rules. As we can see here, the rule number three was the one we discussed first actually. So wave two cannot retrace more than 100% of wave one. So typically it's a 61.8% retracement.

And then rule two was wave three cannot be the shortest wave. Now after wave three, we have wave four. Now typically with wave 4 the retracement is not as deep as wave 2. So let's just delete that fib retracement there and now we'll plot a new one.

So in order to determine where wave 4 will go down to, we start from the beginning of wave 3 which is at this level here. We do a fib retracement from the top of wave 3 down. you can see the wave 4 is already plotted quite nicely at this 38.2 retracement. This is typically where it will retrace to.

Technically wave 4 can come down to any level providing it doesn't cross with wave 1. For example here wave 4 is crossing with wave 1 which means it's no longer an impulse wave. As per the rule number one here wave four cannot overlap wave one. Now there is one exception to that and that's in a pattern called a diagonal which is another type of impulse wave where the waves do overlap like this.

However this is quite a rare finding and so I would never assume that we're in a wave like that in trading because the probability of it being The case is very low. If you see overlapping waves like this, it's more likely a corrective wave. Yeah, anyway, wave falls typically retrace the 38.2. You very often see them come to 50% also, but 38.2 is the most common.

Now wave 5, the way I usually like to project wave 5 is I do a Fibonacci extension of waves 0 to 3. So if this is wave 0 here, this is the genesis of the entire impulse move, and we do a Fib extension of 0 to 3. and extend that from the retracement of wave 4, wave 5 will typically come to the 0.618 extension of waves 0 to 3. Now 0.786 is also another common place for wave 5 to finish, however I'll leave it here. because this is the most common, the 0.618 extension of wave zero to three. So this is our classical, oh dear, this is our classical impulse wave right here, five waves up, and the reason wave two retraces a lot is because at this stage, the move has not established itself.

So there's not, the balls aren't as confident at this stage as they are. later in the impulse move and that's why you see a deep retracement the bears are still trying to take control of this market but after that you get a strong impulse wave three and then the bulls are taking over they're feeling more confident and that's why wave four is a more shallow retracement as i say it's typically a 38.2 retracement of the wave three and then you see this final wave five up now if wave three is not extended As I say, wave 3 is usually the longest wave, but if it's not, if it's for example similar to the length of wave 1, then you can expect the next wave, wave 5, to be extended. In terms of how far wave 3 will go, the best way to determine that is to do a fib extension, and it's typically a 1.618 extension of wave 1. So if this is our wave 1 and we extend that from the beginning of wave 3, wave 3 would come up to here This 1.618 is a typical extension. Yeah, however, it could be the 1.382 1.236 or the 1 yeah, these can all get hit most commonly at this level after that Another common extension is 2.618 or 4.236 This one, not so often, the 3.618. The next common, as I say, the most common is 2.618 and then the 4.236.

This is a very hyper-extended wave 3, yeah? But you do see it when there's a lot of hysteria within the market. You will see these really extended waves. So when you do see these really extended waves and you're looking for where it may retrace, you should look out for these Fibonacci levels, typically the 4.236.

Right, so and as I say wave 5 is a Typically a 0.618 extension of wave 0 to 3. Yeah, so that's our impulse wave right there now After you've seen five legs up you can expect to see a correction wave There's many many different waves of correction patterns and in this video I'm only going to talk about a zigzag, which is what I've drawn here. Yeah, we call this an ABC zigzag And most typically in a zigzag, A wave will be equal to C wave. Okay? So if we do a fib extension, if this is our A wave, C typically is a one-to-one extension.

So it would finish there. Now, One of the most important things to understand about Elliott Wave is we see what's called fractals. So this impulsive wave is made up of both impulsive and corrective waves.

So wave 1 is an impulse wave, wave 2 is a corrective wave, wave 3 is an impulse wave, wave 4 corrective, wave 5 impulsive. So basically the waves going up in the direction of trend are considered impulse waves and the waves that are retracing are called corrective waves. So if we were to draw sub waves of these you would draw something like this one, two, three, four, five and then the retracement would be like a, b, c. yeah this is how you would do the sub wave count and again for wave three you would see five legs up so you see one two three four five and you get the picture this would be three legs down and this would be another five legs up okay likewise with a zigzag yeah Now as I say there's lots of variations but in the case of a zigzag you get an impulse down, then a corrective wave and then another impulse wave down. So this would be five waves down, one, two, three, four, five.

The B leg would be corrective so it's A, B, C. and then you'd get another impulse down in the sea leg one two three four five okay so that's what you can expect from a fractal point of view likewise on a larger degree if we okay We could say this is all part of a larger wave one up to here because we've had five waves up the correction the ABC is wave two and then we see wave three there's not enough space to draw this but wave three would be right up here wave four and wave five even higher yeah so this is the fractal aspect to Elliott Wave that we see on every time level. You'll see it on the one minute chart, you'll see it on the weekly chart, the monthly chart.

These patterns will be there to see. Now these are the very regularly drawn Elliott Wave patterns and it's not always that easy to interpret unfortunately. And it does take a lot of experience and screen time to get used to seeing these patterns.

But this is the general gist of it. In this video I want to illustrate the difference between an impulse wave and a correction wave. In further videos I'll be describing all the different types of correction wave. Impulse waves are typically looking like this. However, you can get what's called a diagonal.

And a diagonal, I'll explain in detail what happens with a diagonal in another video. But basically, it starts to look very corrective rather than... like an impulse.

Wave four overlaps wave one which makes everyone think it can't be an impulse wave and then yeah you'll get a picture something like that okay so that however I won't go into that in this video so this is your typical five waves up and you get your three legs down correction pattern This is in an uptrend obviously if it was down trending you'd see the opposite You'd see these five legs down and then three legs up So for example if price was coming down one two three four five You then see a retracement like this a B C. I'm sorry That was a rather deep retracement there. But yeah, you'd see a retracement like that before seeing the next big wave down here. So impulse waves move in the direction of the trend whilst correction waves move in the direction against the trend.

Typically you see the highest volume on the wave 3. The impulse waves generally have more volume whilst you'll see falling volume within the correction waves, for example wave 2. or wave 4 and the ABC pattern will again have much less volume than the impulse wave and Obviously on a lower degree. This is an impulse wave down so that will have more volume than this correction wave up and then again you'll see higher volume in this impulse wave down. Yeah so that's the the general aspect to Elliott wave.

Here are your three rules, these are the only rules regarding Elliott wave. Yeah so I think that sums up just a little bit about what an impulse and a corrective wave are. As I say impulse waves there's only one main variance, it looks like this.

Obviously there's different flip extension levels as I mentioned all the different levels that wave 3 could go to Which will change how extended the wave looks but it will still apply to these three rules no matter what Except in the case of a diagonal which as I say is rare and you should never bet on being in a diagonal pattern Correction waves will go into a lot more detail with because there's a lot of different variants And this is the key to understanding Elliott wave Once a corrective wave has finished you can expect an explosive move out and you have to fully understand all the variants of correction waves before you can capitalize on that because very often you can think that you're in a correction wave that's finished and all of a sudden you find out it's forming a more complex correction wave and this is what catches traders out time and time again. This is when people lose faith in Elliott Wave and say that it's nonsense. And yeah, for me, Elliott Wave is very, very profitable.

It's a huge aspect to my technical analysis. And combined with other indicators, particularly Fibonacci levels and volume, momentum divergence, it's a very powerful indicator. So I'll leave it at that in this video, but I look forward to further videos, further in-depth videos on Elliott Wave, where we'll explore Elliott Wave technical analysis in more detail. Alright, I'll leave it at that.

Transcript for:Understanding Elliott Wave Theory

Transcript for:
Understanding Elliott Wave Theory