ELLIOTT WAVE THEORY

The Wave Principle

The Wave Principle is Ralph Nelson Elliott’s discovery that crowd behavior
trends and reverses in recognizable patterns. Elliott named and illustrated
thirteen patterns, or “waves” that recur in markets and are repetitive in form
but not necessarily in time or amplitude. He further described how these
structures link together to form larger versions of the same patterns and how
those in turn become the building blocks for patterns of the next larger size and
so on. Regardless of the size, the form remains constant. In 1938, he coined this
phenomenon The Wave Principle.

The Wave Principle describes the pattern of progress and regress characteristic
of social (and apparently other) phenomena in which progress occurs in specific
patterns of five waves and reaction occurs in specific patterns of three waves or
combinations thereof.
 THE DOW THEORY SAYS THAT MARKET TIMING IS
THE KEY TO SUCCESSFUL INVESTING AND THAT
WHEN TO BUY WAS FAR MORE IMPORTANT THAN
WHAT TO BUY.

Disclaimer:

THE Wave principle is not always the perfect answer to all

your Investment and trading needs.

It is a tool to heps minimise the affects of emotional traiding that we

get from the news or sudden changes in price movement
 Wave principles enables traders to HFT phenomenon

http://www.zerohedge.com/news/2017-07-29/our-brave-new-markets-how-hft-algos-risk-sudden-massive-sell
Source: Acrotec.com
 5
B
BASIC WAVES
3

4 C
1

CORRECTIVE

2
CORRECTIVE
Waves within waves!
Source: Acrotec.com
Source: Acrotec.com
Source: Acrotec.com
(3)
(v)

(iv)

Source: Acrotec.com
Wave 4 cannot break below the top of Wave 1

Source: Acrotec.com
Wave 4 cannot break below the top of Wave 1

4 enters 1
If wave 2 is a simple ABC, the wave 4 will be complex, and vice
versa.
CORRECTING WAVES

1. ZIG ZAGS (simple correction)

2. FLATS (simple corrections)

3. TRIANGLES (complex corrections)

Corrective Waves: Wave 2 and Wave 4
Corrective Waves: Wave 2 and Wave 4
Corrective Waves: Wave 2 and Wave 4
Corrective Waves: Wave 2 and Wave 4
Corrective Waves: Wave 2 and Wave 4
Corrective Waves: Wave 2 and Wave 4
Corrective Waves: Wave 2 and Wave 4
Fibonacci Retracements
FLAT
 C

B
THE DEGREE OF THE CORRECTIVE WAVE USUALLY
INDICATES THE STRENGTH OF THE NEXT WAVE

IF VOLUME IS HEAVY ON THE 5TH WAVE, IT IS LIKELY THAT

AN EXTENSION OF THE WAVE WILLL TAKE PLACE.

CORRECTIVE WAVES CAN NEVER END THEIR RETRACEMENT

BEYOND THE START OF THE IMPULSIVE WAVES
 IMPULSIVE WAVES

•WAVE 3 IS OFTEN THE LONGEST, NEVER THE SHORTEST

•USUALLY, 2 OF THE IMPULSIVE WAVES WILL HAVE

EQUAL LENGTH.
 WAVE 1

•LIGHT VOLUME AND LOW VOLATILITY

•FIRST SIGN OF STRENGTH OR WEAKNESS

•BEGINNING OF A NEW TREND

 WAVE 2

•USUALLY A SIMPLE CORRECTION

•LIGHT VOLUME

•FIRST RETRACEMENT
 WAVE 3
•MOST VIOLENT

•HEAVIEST VOLUME

•LONGEST WAVE

•TREND FOLLOWING WAVE

 WAVE 4

•MOST COMPLEX WAVE

•TRIANGLE RECTANGLE FORMATION

•SHOULD NEVER GO BELOW TOP WAVE 1

•VOLUME USUALLY DRIES UP

 WAVE 5

•LIGHTEST VOLUME OF THE IMPULSIVE WAVES

•CAN END AT THE BOTTOM OF WAVE 3 (in a downmove)

•EXTENDED SELLING/BUYING CLIMAX AND HIGH VOLUME

FIBONACCI NUMBERS
Elliott Wave Channel
Elliott Wave Channel
Elliott Wave Channel
Elliott Wave Channel
Elliott Wave Channel
Elliott Wave Channel
Elliott Wave Channel
Suppose that we divide each number into the following number
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………

1/1 = 1 8/5 = 1.6

2/1 = 1 13/8 = 1.625 The ratios converge
3/2 = 1.5 21/13 = 1.615 to 1.618
5/3 = 1.667 34/21 = 1.619

Now, suppose that we divide each number into the previous number
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………

1/1 = 1 5/8 = .625

1/2 = .5 8/13= .615 The ratios converge
2/3 = .667 13/21 = .619 to .618
3/5 = .6 21/34 = .617

1
1 + .618 = 1.618 AND
= 1.618
.618
Suppose that Put another 1X1 Now, put a 2X2
we begin with a square next to it underneath
1X1 square

Now, add a 3X3 square

Connect the corners of the squares and you get the golden
spiral…look familiar??
Golden mean
Math is everywhere!!
 Fibonacci Ratios

Wave 3 to wave 1 : 1, 1.618, 2.618, 4.236...

Wave 5 to wave 1 : 0.5, 0.618, 1, 1.27, 1.382, 1.618...

 Fibonacci Ratios Common retrace ratios

Wave 2: 0.616, 0.786

Wave 4 : 0.382, 0.5

B waves: 0.5, 0.618, 1.00, 1.27

Wave 2s are often sharp and deep.
In an ideal world they would retrace
0.618 or 0.786 most of the time.

Wave 4s tend toward a shallower

retrace and will often find support at
the 0.382 level of wave 3.
Anyways, back to technical analysis. Many of the technical methods are
based on PHI (.618) and powers of .618
.618
.382 = .618*.618 First, draw a trend line
.236 = .618*.618*.618

Draw arcs
that
intersect the
trend at
61.8%, 50%,
and 38.2%
of the high
(these will
indicate
future
supports)
 Draw an initial trend line between two extreme points

Draw rays
that intersect
at 61.8%,
50%, and
38.2%

At the second extreme point, draw a vertical line

Once a reversal occurs, it tends to find support at
Fibonacci levels!
Elliott Waves
n Elliot wave theory relies on cycles within cycles
q Grand Super cycle
q Super cycle
q Cycle
n Each cycle consists of 5 moves with the trend (1,3,5
are impulse, 2,4 are corrective) and 3 that are
against the trend. A “5-3” wave