Elliott Wave Analysis (from Dynamic Trading by Robert Miner)

Elliott Wave Basics

Elliott Wave Basics Wave Notation

W.B:2:5 = "wave B of 2 of 5"

Most trends unfold in five waves in the direction of the trend and three waves in the
direction counter to the trend. major degree wave
intermediate degree wave
Five-wave patterns are impulsive structures. minor degree wave

Three-wave patterns are corrective structures. W.1-3 = "waves one to three"

Impulse Waves Elliott Wave Rules

Impulse waves unfold in a pattern of five waves. A five-wave
pattern is always a part of a larger degree trend.
W.1, W.3, and W.5 within a five-wave pattern are themselves
impulse waves of lesser degree and should each subdivide into a
five-wave pattern.
Once a five-wave pattern completes, the entire sequence should
be corrected by a pattern of either three waves (ABC) or one of a
series of three and five waves known as a "complex correction."
Corrective waves within a five-wave sequence are W.2 and W.4.
One of the impulse waves will usually be extended or be
noticeably longer in price (y-axis) than the other two impulse
waves. In financial markets, the extended wave is usually W.3. In
commodity markets, it is often W.5.
The price ranges of the two non-extended waves (W.2 and W.4)
are usually nearly equal.
W.2 cannot retrace past the beginning of W.1.
W.3 cannot be the shortest of the three impulse waves (W.1,
W.3, and W.5).
W.4 cannot overlap or trade into the territory of W.1.
If any of these rules is violated, the wave structure as labeled
is incorrect and must be reevaluated.
Use the smaller degree pattern to confirm or invalidate the
larger degree pattern.
Multiple Time Frames
The highest probability price projections include projections
from one larger and one smaller degree. The smaller degree
waves confirm the projections of the next larger degree waves.

Implications of Guidelines for Five-Wave Impulse Sequences

Observation Consequence Trading Implication

The market started an impulsive, five- The market cannot trade below (above) Don't place a protective stop more than
wave rally (decline) as of the last swing the beginning of W.1 without invalidating one tick beyond the beginning of W.1.
low (high). the rally (decline).

The market is in the initial stages of a five- W.3 will likely be longer in price range Don't place a protective stop too close to
wave sequence and has completed W.1 than W.1. the price until the W.3 price target has
and W.2 and has begun W.3. been reached.

The market has completed W.3 of a five-
wave sequence, but W.3 is less in price
range than W.1.
W.5 must be less in price range than W.3.
The maximum price target for W.5 is
100% of the price range of W.3. This is the
only situation where we consider W.5 has
a maximum price target.
Move the protective stop very close to the
price once the W.5 target has been
reached.

The market has completed W.3 of a five- The market has invalidated the count of Once W.4 is underway, the maximum
wave sequence and is now in the midst of W.3 and W.4. The wave count must be protective stop loss should be one tick
W.4, and W.4 trades into the range of W.1. reconsidered. below (above) the W.1 high.

W.1, W.3, and W.5 are impulsive and If W.1, W.3, or W.5 do not subdivide into Use price and time projections for the
should subdivide into five-wave patterns of five-wave patterns, reconsider the wave lesser degree pattern to reduce capital
lesser degree. count. exposure and more finely adjust stop
losses.

16-Mar-11 page 1 of 8
Elliott Wave Analysis (from Dynamic Trading by Robert Miner)
Impulse Waves — W.1 and W.3

W.1 W.3
W.1 should subdivide into five waves of W.3 should subdivide into five waves of lesser degree.
lesser degree.
W.3 is never the shortest of the three impulsive waves (W.1, W.3, and W.5).
W.1 is usually greater in time and price
W.3 is usually the extended impulse wave (i.e. greater in price range than W.1 and W.
than the entire prior corrective
5).
sequence (e.g. ABC).
W.3 is typically steeper than W.1 or W.5.
The slope of W.3 often increases once the W.1 extreme is exceeded.
W.3:3 is often a very powerful move with wide-range and gap days.

W.3 vs. W.1

At a minimum, W.3 is usually at least the 100% price projection of W.1.

Typically, W.3 is the 162% to 262% price projection of W.1.
if W.3 is 162% or greater projection of W.1 assume it will be the extended wave.

W.3 vs. W.2

W.3 is typically the 162%, 200%, or 262% retracement of W.2.

Parallel Channels

Draw a trendline from end of W.1 to end of W.3. 3

Projecting W.4

Draw parallel trendline from end of W.2.

1

W.4 will often terminate on or near the parallel channel line

2
from W.2.

Draw a trendline from end of W.2 to end of W.4.

Projecting W.5

Draw parallel trendline from end of W.3.

4
1
W.5 will often terminate on or near the parallel channel line
drawn from W.3.
2

16-Mar-11 page 2 of 8
 Elliott Wave Analysis (from Dynamic Trading by Robert Miner)
Impulse Waves — W.5

W.5

W.5 should subdivide into five waves of lesser degree.

W.5 vs. W.1 W.5 vs. W.4

If W.3 is extended, W.5 will frequently be near 100% APP of W.5 is frequently 127%, 162% (most common) 200%, or 262% of
W.1. the price range of W.4.
If W.5 does not complete near the 100% APP of W.1, it will
W.3-5 vs. W.2
probably complete near the 62% or 162% APP of W.1.
If neither W.1 nor W.3 is extended, W.5 is probably extended The range of W.3-5 is usually the 162%, 262%, or 424%
and will likely complete near the 162% APP or more of either W. retracement of W.2.
1 or W.3. W.5 rarely exceeds the 424% retracement of W.2.

W.5 vs. W.3 W.5 Rate-of-Change

If W.3 is extended, W.5 will frequently be near 38%, 50%, or The slope of W.5 is usually less than the slope of W.3.
62% APP of W.1.

W.5 vs. W.1-3 W.5 Trading Strategies

If W.3 is extended, W.5 will frequently be near the 38% or 62% New trades: Enter new trades against the trend at or near the
APP of W.1-3. completion of W.5. Low risk/high profit potential trade strategy.
If W.5 is extended, it will frequently be near the 100% or 162% Existing trades: Tighten stops on existing trades when nearing
APP of W.1-3. end of W.5.

Unusual W.5 Patterns

Pattern: W.5 subdivides into a 5-wave pattern, and W.5:5 3
5
Fifth-Wave

extreme is less than W.3 extreme. Also, W.4 retracement is

Failure

unusually deep, typically more than 50% retracement of W.

1
1-3.
4

Implications: Correction following fifth-wave failure will 2

likely be deeper than usual.

Pattern: W.1:5, W.3:5, and W.5:5 subdivide into three waves 5:5
Diagonal-Triangle

3:5
each instead of 5 waves, but the W.3-5 extremes are higher 1:5
Fifth-Wave

highs or lower lows as in typical W.5 trend. Also W.4:5 may 3

trade into range of W.1:5. 4:5

2:5
Implications: Fairly rare pattern. More common at market 1 4
peaks than bottoms. Assume complex correction until
proven otherwise. Bodes for a strong correction. Completion 2
confirmed on trade beyond W.2:5 extreme.

16-Mar-11 page 3 of 8
Elliott Wave Analysis (from Dynamic Trading by Robert Miner)
Corrective Waves — General Characteristics

General Characteristics of Corrective Waves

Corrective waves within a five-wave sequence are W.2 and W.4.
Corrective patterns unfold following the completion of a five-wave, impulse structure.
Corrective patterns unfold in at least a three-wave, ABC structure.
Three-wave, ABC corrections may take the form of 5-3-5 or 3-3-5. That is, W.A may subdivide into five or three waves. W.B and W.C
should always subdivide into three and five waves, respectively.
Three-wave, ABC corrections may take several shapes including zigzag, irregular, flat, or running.
Corrective waves may unfold in an almost unlimited progression of threes and fives called "complex corrections." These can include
a series of ABCs separated by so-called "X" waves. An X wave may also be labeled a DK wave ("don't know"). X waves are
frequently used by Elliott wave analysts to make a count fit as a corrective series when there really is no logical pattern other than the
knowledge that the market is not undergoing a five-wave, impulse sequence.
Corrections tend to terminate near the range of the fourth wave of one lesser degree. In other words, a correction commonly
terminates at or near the price of the end of W.4 of the prior trend.
Once a correction terminates, a new five-wave sequence should follow.

Implications of Corrective Principles

Principle Trading Implication

A five-wave sequence is always part of a larger degree trend. A If a trend is followed by a five-wave correction, this is only the
three-wave sequence is always part of a countertrend (i.e. first wave (W.A) of a larger degree correction, not the entire
correction). correction. Expect a three-wave reversal (W.B) followed by a
five-wave W.C.

A correction will usually be greater in time and price than the
prior corrections of lesser degree.
If an ABC correction forms but it is less in time and price than W.
2 and W.4 of the prior trend, it most likely is not the entire
correction but just W.a-c of W.A or W.1-3 of W.A. In either case,
don't consider entering against a three-wave correction unless it
has overbalanced in price and time the prior W.2 and W.4.

Five-wave sequences are always in the direction of the larger If a five-wave sequence unfolds against the direction of the
degree trend. countertrend, it is an initial indication that the countertrend has
completed and may be W.1-5 of W.1 of a new trend. Prepare to
enter the market after the correction to the five-wave pattern.

Principle of Alternation: If W.2 is a three-wave correction, W.4 Don't be hasty to enter the market after three waves of W.4 have
will likely be a complex correction and vice versa. W.2 is usually completed, especially if W.2 was a three-wave correction.
a three-wave pattern.

Complex Corrections and ABCDE Corrections

Any five-wave sequence that does not follow the rules and guidelines of an impulse sequence is probably a correction or part of a
correction with the exception of a fifth-wave diagonal triangle. An ABCDE correction is one example. ABCDE corrections commonly
take the form of a contracting triangle.
Sometimes markets correct in a five-wave, impulsive sequence. (see chart on p. 3.76)
Once the corrective wave structure has demonstrated it is going to extend beyond of the ABC structures, do not take any labeling
scheme too seriously.

page 4 of 8
Elliott Wave Analysis (from Dynamic Trading by Robert Miner)
Corrective Waves — ABC Patterns

ABC Zigzag Correction ABC Running Correction

5 B
2
c:B
2
1 4 5
a
1 4
3 b
C
3
5:A
A
5:C

The correction begins following the completion of a five-wave Appears to be continuation of trend. Implies strong resumption
impulse pattern. of trend.
W.A may be five or three waves. If W.A is five waves, the ABC Occurs infrequently.
correction is called a 5-3-5. If W.A is three waves, it's called a
3-3-5. The correction begins following the completion of a five-wave
impulse pattern.
W.B is a correction of a larger degree correction. W.B should be
a three-wave structure. W.A may be a three- or five-wave and is relatively shallow.

W.C exceeds the extreme of W.A. W.B exceeds the extreme of W.5.

W.C should subdivide into five waves. W.C retraces W.B and does not exceed the extreme of W.A.

ABC Flat Correction ABC Irregular Correction

B
5
5
B

C
A
A
C

The correction begins following the completion of a five-wave
impulse pattern.
W.A may be a three- or five-wave.
W.B tests the extreme of W.5. W.B is a three-wave.
W.C tests the extreme of W.A. W.C is a five-wave.
The correction begins following the completion of a five-wave
impulse pattern.
W.A may be a three- or five-wave.
W.B exceeds the extreme of W.5. W.B is a three-wave.
W.C exceeds the extreme of W.A. W.C is a five-wave.

Correction or Impulse?

An ABC 5-3-5 zigzag unfold exactly like W.1 and W.2 of a trend. Hence, we usually initially label the waves "1 or A" (W.1/A) and "2 or
B" (W.2/B).
If W.3/C extends beyond the 100% APP of W.1/A, the pattern is more likely impulsive (W.1-3) rather than corrective (W.A-C).
If W.3/C trades into the range of W.1/A, the pattern must be a correction or perhaps W.1-2-1:3 of a trend.

16-Mar-11 page 5 of 8
Elliott Wave Analysis (from Dynamic Trading by Robert Miner)
Corrective Waves — W.A, W.B, W.C
W.A
Usually five waves, but may be three
waves.
Impulsive since it's in the direction of the
larger degree trend — which happens to
be a correction.
Similar to W.1. Like W.1, not much to
make price projections with except for last
wave of prior trend and internal waves of
lesser degree within W.A.
16-Mar-11
W.B
Countertrend wave to larger degree
trend — which happens to be a
correction. In other words, W.B is a
correction to the correction.
Frequently a three-wave ABC, but may
be any complex correction.
Usually between the 50% and 78.6%
retracement of W.A, but may be more
than the 100% retracement in an
irregular ABC correction.
W.C
Always five waves.
May or may not exceed the extreme of
W.A.
If W.B has not exceeded the beginning
of W.A, W.C will normally test or exceed
the W.A extreme.
Usually 62%, 100%, or 162% of W.A.
Usually the 100% for simple ABC
zigzags.
Usually 162%, 200%, or 262% of W.B.
Use the price projections for W.5:C to
pinpoint W.C's price target.
page 6 of 8
 Elliott Wave Analysis (from Dynamic Trading by Robert Miner)
Corrective Waves — W.2 and W.4

W.2 and W.4 General Guidelines

Once we believe a five-wave sequence has completed, we can anticipate that at least an ABC correction will follow. In most cases,
W.C will test or exceed the extreme of W.A.
The correction to a five-wave sequence will usually be greater in price range and time range than the corrections within the five-wave
sequence.
W.A can be either a five- or three-wave sequence. If an initial three-wave sequence unfolds, it may be the entire ABC correction or
just W.A of a larger degree ABC. If the initial ABC sequence is less in price or time range than both W.2 and W.4 of the prior trend, it
is most likely a three-wave W.A of the correction.
Once the market makes a five-wave sequence against the trend direction of the correction, we have a strong indication that the
correction has terminated. W.B (correction of the correction) should be a three-wave structure.
Principle of Alternation: If W.2 is an ABC correction, W.4 will probably be a complex correction (i.e. any sequence that is not either
a five-wave impulse or an ABC correction). If W.2 is a complex correction, W.4 will probably be an ABC correction. W.2 is usually an
ABC correction.

W.2 W.4
Tends to be a "simple" ABC correction, usually a 5-3-5 Should not trade into the price range of W.1. If it does, the
zigzag where W.C exceeds the extreme of W.A. wave count is probably incorrect and must be reevaluated.

Cannot exceed the beginning of W.1. Principle of Alternation: If W.2 is a simple correction
(ABC), then W.4 will be a complex correction, and vice
versa. This is a guideline, not a hard-and-fast rule. W.4 is
Guidelines

Usually retraces more than 50% of W.1.

commonly a relatively flat, complex correction.
Guidelines

Usually does not retrace more than 78.6% of W.1.
If W.2 retraces less than 50% of W.1, W.3 will usually be the
extended impulse wave of the five-wave pattern. This is
even more likely if W.2 has a flat or irregular pattern.
The ideal objective is to enter trade at or near the end of
W.2.
Don't enter trade until 50% retracement of W.1 or until trade
Trading Strategies
If one of the many complex, flat corrections (also known
as a "consolidation" or "trading range"), W.4 usually does
not retrace more than 38.2% of W.1-3.
Usually retraces at least 23.6% of W.3 but not more than
50%.
Almost always retraces less of W.3 than W.2 retraces of
W.1.
Often 100% the price range of W.2. If not, usually near the
62% or 162% price range of W.2.

beyond W.1 extreme.

The ideal objective is to enter trade at or near the end of
Trading Strategies

If W.2 exceeds 78.6% retracement of W.1 wait to enter until W.4.

trade beyond W.1 extreme.
Since W.4 is frequently a complex correction pattern is of
If W.A:2 and W.B:2 can be identified, focus on determining little use in identifying its end. Put more emphasis on price
the end of W.C looking for the five-wave subdivisions of and time projections if W.4 has a complex pattern.
W.C.

16-Mar-11 page 7 of 8
Elliott Wave Analysis (from Dynamic Trading by Robert Miner)
Checklists

Impulse Wave Checklist (Bull Market Example)

W.C/E W.1 W.2 W.3 W.4 W.5
Corrective wave. See Corrective wave. See
5 subwaves Corrective Wave Checklist. 5 subwaves Corrective Wave Checklist. 5 subwaves

Assume end of
correction.
Monitor each wave as
it unfolds to confirm or
invalidate wave count.
5 waves up? OK.
3 waves up?
Correction probably
not over. Prepare for
resumption of previous
trend. See Corrective
Wave Checklist.
3 waves down?
Completed zigzag or
W.A:2?
5 waves down? W.A of
zigzag or resumption
of prior trend?
When W.2 completes,
draw a parallel channel
(0 to W.2 from W.1) for
potential W.3 objective.
W.2 should not exceed
beginning of W.1. If it
does, prior trend
should continue. See
Corrective Wave
Checklist.
5 waves up? OK. W.3
must be 5 waves.
3 waves up?
Something wrong with
count. W.3 must be 5
waves. See Corrective
Wave Checklist.
Price range of W.3 is
usually greater than W.
1. If less, it may be a
W.C.
If W.3 is shorter than
162% of W.1, W.5 will
often be extended
wave.
3 waves down? 3 waves up? Possibly
Complete zigzag or start of diagonal fifth-
W.A. If W.A probably wave but more likely
start of complex, incomplete W.5.
sideways correction.
5 waves up? OK.
5 waves down?
Probably W.A of zigzag
correction.
If W.3 was extended
(more than 162% of W.
1) then W.5 will
Check alternation
probably be similar in
guideline for potential price range to W.1.
structure of W.4.
When W.4 completes, If W.3 less than 162%
draw parallel channel of W.1, anticipate
(W.2-4 from W.3) for potential W.5
potential W.5 extension.
objectives.

If W.3 shorter than W.

When W.3 completes,
draw parallel channel
(W.1-3 from W.2) for
potential W.4
objectives.
W.4 cannot enter price 1, W.5 should be
zone of W.1. If it does, shorter than W.3.
consider that a W.3
extension is underway
and this is W.2:3. If If W.4 more than 50%
not, the five-wave retracement to W.3
impulse count is anticipate potential W.
probably wrong. 5 failure.

Corrective Wave Checklist (Bull Market Example)

Are we ready for a
correction? Check status
below.
Has correction started? Monitor progress of correction
Structure of potential W.A and for signals that indicate what
W.B will help confirm or form the correction will take.
invalidate if correction is
underway and will suggest
structure of correction.

W.5 W.A W.B W.C W.D W.E

5 subwaves: ABC, zigzag
3 or 5 subwaves 3 subwaves 3 subwaves: triangle/complex 3 subwaves 3 subwaves

5 subdivisions in 3 waves down? On 3 waves up? W.B 3 waves down? 3 waves up? Probably 3 waves down?
W.5? course for correction should be 3 waves. Probably developing ABCDE (W.C = 62% of Probably ABCDE (W.E
n y but not confirmed. W.A Probably complex ABCDE or other W.B). Check against = 62% of W.C). Check
may be 3 or 5 sideways correction complex correction. If W.A-C trendline. against W.A-B
W.3 longer than
subwaves. developing. W.C = 62% of W.A, trendline.
W.1 or W.5?
probably ABCDE.
n y
W.5 extends above 5 waves up? Not OK.
5 waves down? Assume this is the final
W.3? Probably not part of
Probably zigzag. 5 waves down and subwave of an ABCDE
y correction. Possibly
n W.C tests or exceeds triangle. Next wave
W.5 extension.
W.A? Probably should be impulse
Likely fifth-wave
completion of ABC wave.
failure?
n y 3 waves up? Probably zigzag.
zigzag.
W.5 has Fibonacci
relationship with W.
5 waves down and
1-3? 5 waves up? Wrong
W.C 62% or less of
y wave count. W.B
W.A? Probably
should be 3 subwaves.
developing ABCDE or
other complex
Reassess wave correction.
W.B may exceed W.5
structure
extreme (irregular
ABC). If W.B more
than 127% of W.A, 3 waves down? Either
Ready for wave count probably part of developing W.C
correction wrong. or wrong wave count.

16-Mar-11 page 8 of 8