Part 3 - Retracement Rule 1

7/16/22, 8:23 AM A further description of the Elliott wave theory - NeoWave by Glenn Neely. Retracement rules.
cement rules. The first rule of wave relations. | Lit…
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NeoWave. Part 3. Retracement Rule 1.
Dear friends,
Elliott Wave Principle will always be relevant as a tool for technical analysis in trading. Mastering Elliott waves is an important step in developing
trading skills. Today, I will continue covering the most modern interpretation of the Elliott wave theory described by Glenn Neely in his book
Mastering Elliott Wave.
You can read the previous training article in the NeoWave series here:
Neo Wave theory. Part 1. Rules for creating charts (https://www.litefinance.com/blog/for-professionals/neo-wave-theory-part-1-rules-of-creating-
charts/)
Neo Wave theory. Part 2. Basic information on Polywaves and Structure Labels (https://www.litefinance.com/blog/for-professionals/neo-wave-
theory-part-2-basic-information-on-polywaves-and-structure-labels/)
NeoWave theory by Glenn Neely. Retracement rules. The first rule of wave proportions
Today, as I promised, I will deal with retracement rules, and also with the so-called wave proportions. Well, let’s start!
When and how should you apply retracement rules?

The Retracement Rules are used to increase the accuracy of projections for monowaves. So, you should apply the rules once you have finalized
the terminal points of all monowaves on your chart. Besides, Neely doesn’t recommend applying the rule to the analysis of very complicated
charts that involve the identification of more than 20 monowaves at a time.
At an initial stage, you need to pick the earliest wave on your chart that you wish to analyze. For example, if you are going to analyze five
monowaves, you should start with the earliest one.
Mark it mentally m1 and the next one – m2. Next, calculate the proportion of m2 to m1. To make these measurements more accurately and
swiftly, use the Fibonacci grid. Next, refer to the Rule Identification table below to identify the Retracement rule you should apply to a particular
market situation.
Rule Identification
Rule number Conditions (relation of m2 to m1)
1 Less than 38.2%
2 between 38.2% and 61.8%
3 61.8%
4 Between 61.8% and 100% (exclusive)
5 At least 100% but less than 161.8%
6 Between 161.8% (inclusive) and 261.8% (inclusive)
7 More than 261.8%
Further clarification of the market situation can also require calculating the ratio of m0 to m1, when you use rule 4 you should also measure the
m2/m3 ratio. You should also in advance identify the waves preceding m0. Remember, they should be marked with negative indexes, that is
m(-1), m(-2), and so on. In each rule, I will describe the conditions of the so-called Pre-Constructive Rules of Logic. Besides, the m0 and m2 may
not be monowaves. They may also be complex waves and include 3,5 and more monowaves.
Another important moment concerns the acceptable deviation. For example, you shouldn’t exclude any alternative only because m1 is retraced
60% by m2, and the rule states that it should be retraced at least 61.8%. The NeoWave theory accepts a 4% deviation in both sides for all
Fibonacci retracements. That is, if one of the rules states that m2 should be 61.8% of m1, there are acceptable proportions between 58% and
66%. In some cases, greater deviations are acceptable (up to 10%).
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But the ratios for the previous wave patterns should be strictly observed, no deviations are acceptable in the interpretations of these
parameters. For example, in the description of retracement rules, you will often come across the phrase “if the start of m1 (plus one time unit) is
reached during the time that doesn’t exceed the time it took the entire wave to form”, which should be understood literally.
Here it is necessary to remember that the time unit in the NeoWave theory is the interval between two consecutive points of the chart, that is,
the time interval between the beginning and end of the simplest monowave. In the case of the rule mentioned above, we should add one time
unit to the total time taken m1 to form. For example, if m1 is the simplest monowave, the total amount of time will be two time units. If it is a
polywave (a complex wave), which forms, for example, during five time units, the total time will be six time units.
The final goal is the transformation of the rules described below to the structure labels that I explained in the previous training article. This will
help us more accurately identify both the wave patterns and the segment positions within the patterns. You can learn more about structure
labels in the previous lesson (https://www.litefinance.com/blog/for-professionals/neo-wave-theory-part-2-basic-information-on-polywaves-and-
structure-labels/).
Rule 1
If m2 is moving in the opposite direction of m1 and retraces it less 38.2%, we apply one of the following conditions to measure the relation of m0
to m1 and mark the waves with the structure labels corresponding to the chosen condition.
Condition “a” (mo is less than 61.8% of m1)

1. If the duration of(time period taken to form) m2 is equal or longer than m1 or m3, the end of m1 should be marked as “:5”.
However, if the length of m(-1) is between 100% and 161.8% (inclusive) of m0, and m0, in turn, is about 61.8% of m1, and m4 doesn’t exceed the
end of m0, wave m1 being studied, is likely to complete as a flat complex price pattern, where m2 is in the position of x-wave. It should be
labeled as “x:c3”, and the end of wave m1 us labeled “:s5”. Remember, base structure labels were covered in detail in the previous training article.
2. If m1 reached the start of m0 during the time, less or equal to the period of formation of m0, and m0 is comprised of more than three
monowaves, m0 is likely to be the terminal segment of an important wave pattern. Mark it “:5”, a five. Later, according to the result of the
analysis of other waves, this structure label may be replaced by a more exact one.
3. If the length and duration of wave m0 and m2 are roughly equal or relate to each other in the proportion of 0.618, and the length of m(-1) is
equal or 161.8% of m1 and m3 reaches the length of m(-1) during the period that doesn’t exceed the time of m(-1), there forms a running
correction, where wave b completes noticeably higher (if the trend of a higher degree is bullish) than the peak of the previous rise. Or, it is
noticeably lower if the trend of the higher degree is bearish. That is why you need to add to the label of “:5” at the end of m1 the label of “[:c3]”.
In case there is forming a simple running correction, it will most commonly start at m0, m1 will be the b-wave, and m2 will be the last c-wave.
If m(-2) is shorter than m (-1), and m3 is 161.8% of m1, there is likely to forming a double three starting at m(-2) and finishing at wave m4. The
m1, respectively, is the x-wave in this pattern and so, you add “x” in front of its structure label, so it will look like “x:c3”.
4. If m0 and m2 are roughly equal in price and time or related by 0.618, and m(-1) is less than 161.8% of m1, and the starting point of m3 (plus
one time unit) is reached during the same amount of time (or less) as the duration of m3, there forms a running correction that concludes more
than one wave pattern. In this case, you should put “:c3” after the m1 structure label “:5”.
The x-wave of this correction may be at the end of m0 or be invisible (or missing wave), hidden around the center of m1. You should put “x” to
the m0’s label of “:c3”. Besides, you should circle the center of m1 and put “x:c3” on the right, and “:s5” on the left. I will cover missing waves in
detail in the next articles.
If m(-2) is longer than m(-1), the structure list of m(-1) should be enriched with the position label “sL3”. In this case, the x-wave can’t be at the end
of wave m0.
If m3 is less than 61.8% of m1, a missing wave is more likely to be found in the middle of m1. In this case, you should use the label of “:5” added
earlier.
5. If m0 and m2 are obviously different from each other in price or time or both, and m0 and m2 do not share the same price range, and m1,
when compared to m(-1) and m3, is not the shortest of three, m1 may be a part of a larger Trending Impulse pattern. If so, the previously used
“:5” is used.
Let us see the (a) condition of Rule on the example below.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.19/BTCUSD_hyipov_1.jpg?
q=75&s=0b1d5ca98debd40d8add9711e20bfc85)
First, we check the conditions of Rule 1. the wave m2, marked with the green line in the chart, is less than 38.2% of m1, marked with the red line
and comprised of two monowaves in the same direction. To construct the chart, I used the NeoWave V0 indicator, which I described in the first
article in the NeoWave series.
Now, we shall identify what condition applies in our case. The length of m0 is less than 61.8% m1. So, we should apply the condition “a” of Rule 1.
q=75&s=7a7e996001a9d45e67f2b8efac46c917)
Now, we shall pick up one of the paragraphs of the condition (a) that will be relevant to find out the pattern, whose element is m1. The duration
and length of m0 and m2 (price projections of these waves are marked with the green areas) are much different, and their projections do not
overlap, which is clear form the visual analysis of the chart.
q=75&s=5f77c2f5994788de2361964f6147512e)
The length of m(-1) is 176 pips (red area), m1 is 583 pips (green area), and m3 is 197 pips (blue area. So, m(-1) is the shortest.
q=75&s=9f472a554d438343d9f98d83c81d6e87)
So, according to paragraph 5 of the (a) condition, m1 may be a part of a larger Trending Impulse, so we mark it “:5”.
Condition (b). If m0 is at least 61.8% but less than 100% of m1

When the (b) condition is met, place the structure label “:5” at the end of m1.
1 If the length of m(-1) is between 100-161.8% (inclusive) of m0, and m4 doesn’t exceed the end of m0, m1 is likely to be the final wave of a flat
pattern within a complex formation, where m2 is an x-wave. So, you should place “:s5” at the end of m1 and “x:c3” at the end of m2. In some
cases, you may need additional structure labels, the list of which is below. Live Chat (https://my.litefinance.com/?openPm=2)
2 If m0 is composed of more than 3 monowaves, and m1 (minus one time unit) reaches the start of m0 during the same amount of time (or
less) it took m0 to form, m0 may complete an important Elliott pattern.
3 If a part of m2’s price range is shared by m0, and m3 is longer than and more vertical than m1 during a time equal to that of m1 (or less), add
“:sL3” to the structure list of m1.
4 If the price projections of m2 and m0 partially overlap, m(-1) is shorter than m1, m3 is longer than m1, and its time span is equal (or shorter)
than the duration of m1, and m1 and m0 are obviously different in price and/or time, m4 (the group of wave m4-m6) reaches the beginning
of m1 in a time period of 50% of that taken m1 through m3, m3 is likely to conclude a 5th Extension Terminal pattern. So, we should add
“:c3” to m1’s structure list.
5 This paragraph deals with the case when m3 is shorter than m1, a part of m2’s range is shared by m0, m(-1) is longer than m0 and m1, when
compared to m(-1) and m3, is not the shortest of the three. Besides, from the end of m3, the market return to the beginning of m1 (or
beyond) in a span of time which is 5
Let us see how condition (b) of Rule 1 is applied to the example of the BTCUSD market.
q=75&s=df27be82e82d6478c314df28eed6f6d7)
Let us check the criteria of the first rule, condition (b). The m2 marked with the short red line is less than 38.2% of m1, marked with the green line
that is longer. So, this case refers to rule 1.
q=75&s=7a324e5e0510edbf4765f10dfa363bf0)
The length of wave m0 is almost 78.6% of m1, so, it is between 61.8% and 100% of m1. So, the condition (b) of rule 1 is fulfilled. I marked the start
of m0 with the red filled circle, as the end of the previous wave m(-1) is shifted according to the rule of neutrality, which I described in the first
article in the NeoWave series.
q=75&s=078b348cb813f3f52c4bd359686486de)
So, we need to pick up the relevant paragraph of the (b) condition. The m(-1) is almost of 161.8% m0.
q=75&s=bda9995399f55a15e0b21086d42161fb)
The terminal point of m0 (marked with the horizontal pink line) doesn’t exceed the start of m4. Therefore, there is relevant paragraph 1 of the (b)
condition, and m1 is likely to finish a flat pattern within a complex formation, where wave m2 is an x-wave. So, put “:s5” at the end of m1, and
“x:c3 s5” at the end of m2. Other paragraphs of condition (b) are not met, and so, we won’t take them into consideration.
Condition (c). m0 is between 100% and 161.9% of m1 (inclusive)

Place “:5” at the end of m1.
1 If m0 and m1 are approximately equal (allow a deviation of 10%) in price, and m0 and m1 are equal or related by 61.8% in time, and m3 is
longer than m1, and m2 takes as much time as m1 or less, and m2 takes less time than m1 and is very close to 38.2% of m1, and mo has a
structure label of “:F3”, we add “[:c3]” to m1’s structure list. The “[:c3]” is in brackets as it is a risky choice. The chance of “:c3” to be good
increases, if m2 terminates at an important Fibonacci level to m0, m1 or the preceding impulse wave of any complexity.
2 If m3 is longer than m1, m4 doesn’t reach level 61.8% of m3 or reaches the beginning of level m3, m2 is about 38.2% of m1, m(-3) is longer
than m(-2), and m(-2) or m(-1) is longer than m0, m1 may be the second-to-last leg of a Contracting triangle, add “(:sL3)” to the structure list
of m1. However, even under these ideal conditions, “:sL3” structure label is still less likely than “:5” placed earlier, that is why it is in the
brackets.
Let us see the (c) condition on the example.
q=75&s=aa9009d9b77ca8ee91f8a0eff01fc418)
In this case, the first paragraph is relevant, as m2 doesn’t reach 38.2% of m1, marked with the red line, it is composed of two monowaves in the
same direction.
q=75&s=02af4d949afa3563b95c368240e4d145)
Wave m0, marked with the green line, is 100% of m1. So, the (c) condition of the first rule is fulfilled. So, I put “:5” at the end of m1. Neither of two
particular cases in the (c) condition, so, m1 structure list of m1 at this stage is complete.
Condition (d). m0 is more than 161.8% of m1.

There is only one alternative under these circumstances. If m0 is longer 161.8% of m1, put “:5” at the end of m1. Condition (d) is met quite rarely,
though it is the simplest to analyze.
That is all for today. In the next training article, I will explain the second rule of retracement.
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Price chart of BTCUSD in real time mode

Periods M1 M5 M15 M30 H1 H4 D1 W1
Zoom 1D 1W 1M 3M 6M 1Y ALL
45k
40k
35k
30k
25k
20k
15k
Feb '22 Mar '22 Apr '22 May '22 Jun '22 Jul '22
Jan '21 Jul '21 Jan '22 Ju…
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.19/BTCUSD_hyipov_logo.jpg?q=75&w=1000&s=3ef5cd722acd1344b61b0a8176017363)
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7/16/22, 8:23 AM A further description of the Elliott wave theory - NeoWave by Glenn Neely. Retracement rules.

cement rules. The first rule of wave relations. | Lit…

NeoWave. Part 3. Retracement Rule 1.

When and how should you apply retracement rules?

Rule number Conditions (relation of m2 to m1)

1 Less than 38.2%

2 between 38.2% and 61.8%

4 Between 61.8% and 100% (exclusive)

5 At least 100% but less than 161.8%

6 Between 161.8% (inclusive) and 261.8% (inclusive)

7 More than 261.8%

Condition “a” (mo is less than 61.8% of m1)

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Condition (b). If m0 is at least 61.8% but less than 100% of m1

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Condition (c). m0 is between 100% and 161.9% of m1 (inclusive)

Let us see the (c) condition on the example.

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Condition (d). m0 is more than 161.8% of m1.

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