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 Elliott Wave Theory

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Birthday : 1990-05-18
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PostSubject: Elliott Wave Theory   Elliott Wave Theory Icon_minitimeMon Sep 29, 2014 4:20 pm

I think our community is becoming more interested in technical aspect of trading and mature enough to grasp the concept of wave patterns.

I strongly recommend learning Elliot Wave Principal. 

Here is the basic Idea. 


In a freely traded and liquid market the price should follow the Elliot patterns. If the price action does not confirm to elliot patterns, implies the price is manipulated or external interferences by way of news etc.

Elliott Wave Theory interprets market actions in terms of recurrent price structures obedient to the Fibonacci sequence. Basically, Market cycles are composed of two major types of Wave : Impulse Wave and Corrective Wave. For every impulse wave, it can be sub-divided into 5 - wave structure (1-2-3-4-5), while for corrective wave, it can be sub-divided into 3 - wave structures (a-b-c). 

Elliott Wave Theory Ew110

Surfer's Waves within Wave

An important feature of Elliott Wave is that they are fractal in nature. 'Fractal' means market structure are built from similar patterns on a larger or smaller scales. Therefore, we can count the wave on a long-term yearly market chart as well as short-term hourly market chart. 

See waves within wave:

Elliott Wave Theory Ew210

Rules for Wave Count

Based on the market pattern, we can identify ' where we are' in term of wave count. Nevertheless, as the market pattern is relatively simplistic, there are several rules for valid counts: 

Wave 2 should not break below the beginning of Wave 1; 

Wave 3 should not be the shortest wave among Wave 1, 3 and 5; 

Wave 4 should not overlap with Wave 1, except for wave 1, 5, a or c of a higher degree. 

Rule of Alternation : Wave 2 and 4 should unfold in two different wave forms. 

Wave forms in Impulse Wave

There are three major types of wave form in Impulse Wave: 

(a) Extended Wave

Among Wave 1, 3 and 5, only one should unfolded into extended wave. 'Extension' means the wave is elongated in nature and sub-waves are conspicuous in relation to waves of higher degree. 

See extension pattern:

Elliott Wave Theory Ew310

(b) Diagonal Triangle at Wave 5

Sometimes, the momentum at Wave 5 is so weak that the 2nd and 4th sub-waves overlap with each other and evolved into diagonal triangle. 

(c) 5th Wave Failure

In some other circumstances, the Wave 5 is so weak than it even cannot surpass the top of the wave 3, causing a double top at the end of the trend. 

See diagonal triangle and failure fifth pattern:

Elliott Wave Theory Ew410

Wave Forms in Corrective Wave

Corrective Wave forms are rather complicated, but basically we can categorize them into six major wave forms: 

Zig-Zag : abc pattern composed of 5-3-5 sub-wave structure. 

Flat : abc pattern composed of 3-3-5 sub-wave structure, with b equals a. 

Irregular : abc pattern composed of 3-3-5 sub-wave structure, with b longer than a. 

Horizontal Triangle : 5-wave triangular pattern composed of 3-3-3-3-3 sub-wave structure. 

Double Three : abcxabc pattern composed of any two from above, linked by x wave. 

Triple Three : abcxabcxabc pattern composed of any three from above, linked by two x waves. 

See Six Corrective patterns:

Elliott Wave Theory Ew510


The attractiveness of Elliott Wave Analysis is : Three impulse wave forms and six corrective wave forms are conclusive. All we have to do is to identify which wave form is going to unfold in order to predict future market actions. This is a bold statement, needless to say, knowledge of market historical wave patterns and experiences in wave count are of paramount importance. 

The subject is vast. Takes time to understand. Good luck.

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