The Elliott Wave Principle


B unfold as 3’s, and are sucker plays, especially in expanded/irregular flats. Wave B’s are usually zigzags, and the next most likely is a triangle. Confirmation that a trend change has occurred of a certain degree comes with a 5-wave move of one lesser degree in the opposite direction. You need short term charts to analyze subdivisions in fast moving markets, and long term charts for slowly moving markets.

elliott wave patterns

Waves 1, 3 and 5 are aligned with the market trend, while waves 2 and 4 represent a mild price pullback. Waves 1, 3 and 5 are called impulse waves, as they move the price impulsively and vigorously. In the above illustration, waves 1, 2, 3, 4 and 5 together complete a larger impulsive sequence, labeled wave . The impulsive structure of wave tells us that the movement at the next larger degree of trend is also upward. It also warns us to expect a three-wave correction — in this case, a downtrend.

Elliott wave and Fibonacci

Real-time markets, it was observed that a motive wave could comprise three waves instead of five. In fact, most of the time, the market will see a motive wave that is composed of three waves. It is also possible that the market keeps moving in corrective waves. Therefore, three-wave trends are more common than five-wave trends. In a bull market, a motive wave takes the stock price upwards, while a corrective wave reverses the trend.

This was the first significant work since Elliott’s passing. J. Frost collaborated to write the book Elliott Wave Principle. Astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.


You will find it difficult to grasp in you are not familiar with this theory but with reading and some experience in stock markets, you begin to make good background which will enhance with time. “The stock market is not a random, formless mess reacting to current news events but a remarkably precise recording of the formal structure of the progress of man” . Rather, it unfolds in waves, and “when presented clearly, the basic tenets of the Wave Principle are easy to learn and apply” (authors’ note). However, implementing an Elliott wave strategy can be tricky in practice; identifying waves and phases is a skill that takes time to master. That’s why it’s always a good idea to start with a demo account which gives you virtual funds to try out Elliott wave trading on real markets. To trade Elliott waves, you first determine whether your market is in a bull or bear trend, and then whether it is in the motive or corrective phase of the pattern.

1 Elliott Wave 1 and wave 2

Instead, it gives you an objective means of determining the probability of a future direction for the market. So, it’s important for any investor or trader to carefully assess the probability of each interpretation. Only then can we interpret where the market is and where it’s likely to go.

• Wave 4 always subdivides into a zigzag, flat, triangle or combination. The Elliott Wave principledescribes the psychology of crowds. Social mood drives social action and has structure and form.

  • This is why beginner traders can stumble when attempting to implement Elliott wave and often end up looking for alternative trading strategies with easy-to-follow sets of rules.
  • Since Wave 1 represents the beginning of a trend, investors can seek to ride Wave 3, which is also one of the longest waves in the cycle.
  • A perfect, 100% accurate method of analysis does not exist.
  • Consequently any person acting on it does so entirely at their own risk.
  • When 3 is approaching 1, if wave structure looks immature, assume 3 will reach 1.618 times 1.

The above shows the eight-wave sequence with a rising five-wave motive wave and a falling three-wave correction. You will notice that this movement, from beginning to end, finishes higher than it started (i.e., price increased). If you think about it, a 5-3 structure is the minimum requirement to achieve both fluctuation and progress in an up or down direction.

I am not suggesting that you buy this book, but that’s where I found the patterns. Traders holding the company’s shares should have intended to sell them when the price got closer to this objective. When the fifth wave finished, the chances of a correction rose, and given the already irrational swings that had occurred, the chances of traders trying to buy from a point beyond the wave 5 level may decrease.

5 Relation between Fibonacci and Elliott Wave

This is the first impulse bear move of the corrective phase. Prices are low and early contrarian investors consider the market oversold and cheap. There is a slight uptick in prices with minimal volume driving demand higher. The Elliott Wave Theory is considered one of the ‘holy grails’ in the financial markets.

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Accurately predicting market moves with the EWT requires practice and skills because traders need to figure out how to draw the wave counts. This means that its use can be risky – especially for beginners. There is an ongoing debate regarding the efficiency of the Elliott waves.

That correction, wave , is followed by waves , and to complete an impulsive sequence of the next larger degree, labeled as wave 1. At that point, again, a three-wave correction of the same degree occurs, labeled as wave 2. The Elliott Wave principle consists of impulse and corrective waves at its core.

The wave count depicted in the chart would be invalidated if GBP/JPY moves above or even touches the wave-1 low. The dominant trend is downward, so the pattern is reversed—five waves down and three up. As such, there is no right way to use it, and it is inherently subjective.


There are several Wave software applications out there that claim to do all the best wave counts for you, but with all the variables in the market, it is much better to make the counts yourself. The Elliot Wave Principle is mostly used by technical analysts in determining the future price movements of stocks, bonds, and commodities. Basically, the Elliot Wave states that future prices can be forecasted in smaller waves or patterns.

Elliott Wave examples

The 13-month “correction” was over, and the market immediately turned to the upside. Two months later, as the market continued its upward climb, Collins agreed to collaborate on a book on the Wave Theory. Motive sequence is much like the Fibonacci number sequence. If we discover the number of swings on the chart is one of the numbers in the motive sequence, then we can expect the current trend to extend further. The Elliott Wave theory was developed by Ralph Nelson Elliott in the 1930s.

Stop-loss orders are common tools that can help to minimise capital loss on unsuccessful trades. You will automatically be granted access to a free demo account where you can practise with virtual funds. Waves 2 and 4 may frequently bounce off Fibonacci retracement levels​​. Wave 2 cannot retrace more than the beginning of wave 1.

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Wave 2 can’t retrace more than 100% of the preceding wave 1 move. As defined by Prechter, Motive Waves always move in the same direction as the bigger trend. So, if we zoom out to longer timeframes, the movement from 1 to 5 can also be considered a single Motive Wave , while the A-B-C move may represent a single Corrective Wave . […] the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave.