ELLIOT WAVE THEORY

ELLIOT WAVE THEORY

The Elliott Wave Theory is named after Ralph Nelson
Elliott. Inspired by the Dow Theory.

Elliott based part his work on the Dow Theory, which also defines
price movement in terms of waves.

In the 1930s, Ralph Nelson Elliott found that the markets exhibited
certain repeated patterns.

The Elliott wave principle is a form of technical analysis that

some traders use to analyze financial market cycles and
forecast market trends by
trends identifying extremes in investor
psychology,
psychology highs and lows in prices, and other collective factors.
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Using the Elliott Wave Principle is an exercise in
probability.
probability An Elliottician is someone who is able to
identify the markets structure and anticipate the most
likely next move based on our position within those
structures.

By knowing the wave patterns, you’ll know what the

markets are likely to do next and (sometimes most
importantly) what they will not do next. By using the
Elliott Wave Principle, you identify the highest
probable moves with the least risk.
risk
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How Can I Apply the Elliott Wave Principle?

How do you begin applying the Elliott Wave Principle? By starting at
its most basic level. The Elliott Wave Principle works by identifying
patterns in market prices. So, in other words, we start by analyzing
waves on a chart.

Elliott’s pattern consists of “impulsive waves” and “corrective

waves.”
An impulsive wave is composed of five subwaves. It moves
in the same direction as the trend of the next larger size.
A corrective wave is divided into three subwaves. It
moves against the trend of the next larger size.
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Elliott Wave theory states that prices move in waves.

waves
These waves occur in a repeating pattern of a (1) move
up, (2) then a partial retracement down, (3) another
move up, (4) a retracement, (5) then finally a last
move up. Then, there is a (A) full retracement,
followed by a (B) partial retracement upward, then
(C) a full move downward. This repeats on a macro
and micro time frame. A visual illustration of the basic
pattern of the Elliott Wave is given below. A real life
example of Elliott Wave in action is given further down.
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Three main rules for impulse waves in Elliott Wave

theory 
There are 3 main rules, which anyone who wants to
make an Elliott Wave analysis must know.

First rule: Wave
rule 2 cannot retrace the whole wave 1.

Second rule: Wave
rule 3 cannot be the shortest among
waves 1, 3 and 5.

Third rule: Waves
rule 1 and 4 must not overlap.
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Simple Correction (Zig-Zag): There is only one pattern

in a simple correction. This pattern is called a Zig-Zag
correction. A Zig-Zag correction is a three-wave pattern
where the Wave B does not retrace more than 75
percent of Wave A. Wave C will make new lows below
the end of Wave A. The Wave A of a Zig-Zag correction
always has a five-wave pattern. In the other two types of
corrections (Flat and Irregular), Wave A has a three-
wave pattern. Thus, if you can identify a five-wave
pattern inside Wave A of any correction, you can then
expect the correction to turn out as a Zig-Zag formation.
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Wave B
 Usually 50% of Wave A
Should not exceed 75% of Wave A
Wave C
 either 1 x Wave A
or 1.62 x Wave A
or 2.62 x Wave A
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THANK YOU