Before going on to Elliott wave patterns, we’ll first learn the golden rules of Elliott wave theory. Do you know these golden rules of the Elliott Wave theory?
I won’t discuss about Elliott Wave’s history or such things in this post. You can easily get this info on the Web.
Counting Elliott waves is a talent that may be learned via practice and following the principles outlined below.
It’s a good idea to start using a wave-count on a market you’re comfortable with and adjust it as you gain experience.
Let’s start with the rules of Elliott wave theory
- The Golden Rules of the Elliott Wave Theory
- Elliott Waves Patterns
The Golden Rules of the Elliott Wave Theory
- Wave 2 cannot be lower than wave 1’s origin.
- Wave 3 cannot be the shortest impulse wave.
- Wave 4 cannot end in the price territory of wave 1.
Elliott Waves Patterns
The Impulse and the Diagonal are the two forms of motive waves.
We’ll go through both of these types of waves in better detail now.
The Impulse Wave Pattern
It is the most common and simplest wave pattern to identify in a market.
There are five waves in the impulse pattern.
The five waves might be either upwards or downwards.
In general, the first wave is a little rally involving just a small percentage of active players.
Upon completion of Wave 1, they would sell the market in Wave.
The Wave 2 sell off is usually fast.
Wave 2 ends without new lows as the market begins to turn for another rally.
The first phases of the Wave 3 Rally are sluggish and ultimately reach the top of the Wave 1.
There are several pauses above the top of Wave 1 at this moment.
The Wave 3 takes the steam up after taking the top of the first wave.
After taking the stops out, the Wave 3 rally has caught the attention of traders.
This is the moment when the majority of traders think the trend is up.
Finally, the whole rush of buying disappears; Wave 3 is halted.
Traders who have long been from the lows are making profits.
Profit booking now starts to take place.
This leads the price to draw back and this is the start of wave 4.
Wave 2 has been a furious sell; Wave 4 is a steady profit taking.
The trend remains positive for majority of traders and they consider this profit taking an excellent opportunity to buy.
At Wave 4’s end, further buys take place and the prices start to rise again.
The Wave 5 is without the enormous excitement and strength of the Wave 3 rally.
A tiny number of traders is the reason of Wave 5 progress.
Diagonal Wave Patterns
The second type of motive wave is a diagonal wave.
It consists of five sub-waves and aims to move the market toward the trend.
The difference is that the diagonal looks like an expansion or contracting wedge.
As we previously discussed, the fourth wave of any impulse cannot overlap the first wave’s ending point.
When we expect to see an impulse wave, an overlap might occur.
If you expect wave one or five to appear as an impulse, but you observe a 5-wave price movement on the chart with an overlap between waves one and four, there will often be a leading diagonal or an ending diagonal.
What is the difference between Leading Diagonal and Ending Diagonal?
Leading Diagonal Pattern
In wave 1 of an impulse or wave A of a zigzag, a leading diagonal can form.
In short, a leading diagonal is the start of a zigzag or impulse.
In wave 5 or C, an ending diagonal might occur at the same moment.
We’re going to learn more about a leading diagonal below.
The Fundamentals of a Leading Diagonal Pattern
- This pattern is split into five waves.
- Wave 2 never reaches the location where wave 1 began.
- Wave 3 always smashes the first wave’s termination point.
- Wave 4 frequently breaks down that point where wave 1 ends.
- Wave 5 breaks the ending point of wave 3.
- It’s unlikely that Wave 3 will be the shortest.
- Wave 2 can’t be in the shape of a triangle or a triple three.
- Waves 1, 3, and 5 might seem like zigzags or impulses.
Ending Diagonal Pattern
Five waves, marked 1-2-3-4-5, make up the ending diagonals.
Each wave is split into three sub-waves.
Waves 1 and 4 have a price overlap.
Wave 3 can’t possibly be the shortest of the three waves (1, 3, and 5).
Wave 1 is often the longest, though this is not always the case.
The spots where you should be looking for an ending diagonal are wave 5 of an impulse and wave C of an A-B-C correction.
Prices are expected to return to the level where the pattern began forming an ending diagonal.
The entire impulse was developing normally until wave 5, which became choppy and overlapped, indicating a change in trend direction on the way.
An ending diagonal can be traded in three ways.
The most aggressive strategy is to enter a position toward the end of wave 5, with a stop-loss order at the point where wave 3 becomes the shortest of waves 1, 3, and 5.
When price breaks the line between waves 2 and 4, the second strategy is to open a position.
And the safest option is to wait until the end of wave 4 is taken.
Zig Zag Pattern
In a simple correction, there is only one pattern; A Zig-Zag correction is the term for this pattern.
A Zig-Zag pattern is a three-wave pattern in which Wave B retraces no more than 75% of Wave A.
Below the conclusion of Wave A, Wave C will make new lows.
A Zig-Zag correction’s Wave A always has a five-wave pattern.
Wave A has a three-wave pattern in the other two types of corrections (Flat and Irregular).
As a result, if you can find a five-wave pattern within Wave A of any correction, you may expect the correction to be a Zig-Zag.
Flat Correction Patterns
Each wave in a Flat correction has the same length.
The market dips in Wave A after a five-wave impulse pattern.
It then rallies to the previous high in a Wave B.
Finally, in Wave C, the market falls one last time to the previous Wave A bottom.
A flat pattern is another basic corrective; it too subdivides into three waves and is labelled A-B-C, but the structure is different.
The basic guidelines for flats are as follows:
- Three waves make up the flats.
- Except for triangles, Wave A might be any type corrective pattern.
- Wave B can be any type of corrective pattern, although it’s usually a zigzag.
- Wave C is always either an impulse or an ending diagonal .
- Wave B is greater than 90 percent the length of wave A.
- Wave C is generally the same length as wave B, if not longer.
- The motive waves are A and C, whereas the corrective wave is B.
There are three varieties of flat patterns, as shown in the chart below, depending on the length of waves B and C.
Horizontal Triangle Pattern
The horizontal triangle is a pattern made up of five sub-waves that create a 3-3-3-3-3 structure, denoted by the letters A-B-C-D-E.
This pattern, unlike the motive wave, which has five waves, depicts a balance of forces and moves in a sideways pattern.
The sub-waves are corrected, forming a pattern of threes.
The horizontal triangle can either be growing, with each subsequent sub-wave increasing in amplitude, or contracting, with each subsequent sub-wave decreasing in amplitude.
Triangles can also be classified as symmetrical, descending, or ascending based on whether they appear to be heading sideways (as in the image above), up with a flat top and rising bottoms (ascending), or down with falling tops and flat bottoms (descending).
Sub-waves can be made up of a variety of different patterns, not simply zigzags or flats.
Although spotting a triangle may appear simple in theory, becoming familiar with them in the market may take some time.
A triangle can be extended by having its fifth wave be a smaller triangle.
Wave E will not be a three-wave structure, but rather a horizontal triangle.
Horizontal triangle pattern always appear before to the last move of the prior pattern, or as the final pattern in a combination.
This implies they’ll show up as Wave 4 in an impulse wave or Wave B in a zigzag wave.
This can help an analyst spot a trend shift.
These are the 80-year-old patterns discovered by Ralph Nelson Elliott.
The Elliott Wave theory is a natural order and it may still be used today with the same success rate.
Without a doubt, the elliott wave theory can forecast reversals.
This is maybe the finest aspect of it.
While most traders and investors just follow the trend, Elliotticians have the advantage of being able to anticipate a potential shift in the trend’s direction.
We are not claiming that the approach is simple to understand and use, but if you put in the effort and study, we are confident that it will become your favorite.