Elliott Wave Basics & Principles

Index
Index Structure is still under construction
1.

Elliott Wave Basic Idea

2.

Elliott Wave Charts

3.

Elliott Wave General Structure

4.

Elliott Wave Aspects

5.

Elliott Wave Types & Functions

6.

Elliott Motive Waves

a.

Rules

b. Impulsive
c.

Extensions

d. Truncated

7.

e.

Leading Diagonal

f.

Ending Diagonal

Elliott Corrective Waves

a.

ZigZag

b. Flats
c.

Triangles

d. Complex Combination
8.

Elliott Wave Alternations

9.

Elliott Wave Projections & Retracements

10. Elliott Wave Degrees

11. Elliott Wave Personalities
12. Elliott Wave Example

13. Elliott Wave Trading Strategy

Elliott Wave Basic Idea

Elliott Wave Theory was developed by Ralph Nelson Elliott in late 1920s who was a retired accountant and
which was later popularized by Robert Prechter. Elliott thought that the market behaves in a somewhat
chaotic manner, in fact traded in repetitive cycles and in a continuous growth [Note: There is a technical
debate on the idea of continuous growth] .
Elliott made detailed stock market predictions based on unique characteristics he discovered in the wave
patterns. An impulsive/motive wave, which goes with the main trend, always shows five waves in its pattern.
On a smaller scale, within each of the impulsive waves, five waves can again be found. In this smaller pattern,
the same pattern repeats itself ad infinitum. These ever-smaller patterns are labeled as different wave degrees
in the Elliott Wave Principle. Only much later were fractals recognized by scientists.
In the financial markets we know that "every action creates an equal and opposite reaction" as a price
movement up or down must be followed by a contrary movement. Price action is divided into trends and
corrections or sideways movements. Trends show the main direction of prices while corrections move against
the trend. Elliott labeled these "motive" and "corrective" waves. Elliott considered that these 5 motive wave
structure + 3 corrective wave structure as 1 cycle.
There are some main differences between Dow Theory and Elliott wave theory yet they both agree on the
basic of higher highs and higher lows & vice versa. These differences are:
1.

Dow Theory is interested in economic trends but Elliott Wave is interested in the move structure
itself either up down.

2.

Dow considered that daily charts are noise. Elliott estimated that there is no noise even with one
minute chart.

3.

Dow made a psychological analysis for every phase of the trend. Elliot made a personality analysis
for each wave.

Tips n Tricks

Tips n Tricks : Elliot analyses moves not a trend

Corrective waves are not trend corrections.

Elliott Wave Charts

Line Close charts are preferred but not as High/Low charts
Arithmetic (preferred) but could be used as Logarithmic charts

Tips n Tricks

Tips n Tricks : Close (line charts) are preferred than Hi/Lo (high/Low) kind of charts such as bara and
candlestick charts because due to some volatility some waves may overlap as low prices but not really overlap
as close prices.

Elliott Wave General Structure

Elliott Wave consists of 8 waves. 5 Motive waves and 3 Corrective waves which form one Elliott Cycle. 5, 3
are part of Fibonacci sequence plus 5 waves are needed as a progressive price action while 3 waves are
considered as fluctuation.

Elliott Wave Aspects

Elliott Wave Rules and Guidelines are based on structure patterns and Retracements: Rules (No Twisting)
are applied to Elliot Wave Structure & Patterns, but Guidelines (May happen or not) are applied timing and
ratio retracements and/or projections.
Patterns based on (Rules)
-----------------------------Ratio based on (Guidelines)
Time based on (Guidelines)
Types of Guidelines:
1.

Strong

2.

Moderate

Tips n Tricks

Tips n Tricks : Rules are rules cannot be twisted

Strong Guidelines are almost rules but sometimes there are exceptions
Moderate Guidelines may happen and may not happen.

Elliott Wave Types & Functions

Elliot Waves are mainly divided into two main parts
1.

Motive:
They are of 5 waves structure and are considered progressive as they add a positive or negative
advance to price actions

2.

Corrective:
They are of 3 waves structure and are considered fluctuation as cause some retracement to the main
price action moves but not a real reversal or advance.

Elliot Wave Functions are divided into two main parts

1.

Action:
Is the wave that adds and goes in the same Elliot Wave main direction

2.

Corrective:
Is the wave that retraces and goes against Elliot Wave main direction
Examples:
o

Wave 3 is an actionary wave to wave 1. Wave 2 is a reactionary wave to wave 1

Wave b is a reactionary wave to wave a.

Corrective waves are reactionary to Motive waves

Elliott Wave Types:

1.

Wave Type
a.

Motive
i.

Impulsive

Extended

Truncated

ii.

Leading Diagonal

iii.

Ending Diagonal

b. Corrective

2.

i.

ZigZag

ii.

Flat

iii.

Triangles

iv.

Complex

Wave Function
a.

Action

b. Reactionary

Elliott Motive Waves

Motive Wave Rules
1.

5 Wave Structure. It can be 5 (normal) or 9 (if one wave is extended).

2.

Wave 2 never retraces 100% of wave 1 even by one cent (higher low)

3.

Wave 3 travels beyond wave 1 (higher high)

4.

Wave 3 is never the shortest and usually the longest (This is a Guideline not a Rule)

5.

Wave 4 never retraces 100% of wave 3 even by one cent (higher low)

6.

Wave 5 is not a must to cross wave 3

7.

Must move the market as a price action as a progressive not as a fluctuation

Impulsive Wave
1.

They have motive rules but wave 4 does not overlap wave 1 not even by one cent

2.

Wave 1,3, and 5 should be motive

Tips n Tricks

Tips n Tricks : Use line chart for close prices instead of highs/lows bar/candle charts as these carts may
overlap by their lows but not by the lose prices.
Extended Waves
Extended waves are motive waves that come as a part and sub-division inside one of the motive waves 1, 3, or
5
Conditions and Guidelines for extended waves:
1.

Extensions can come in wave 1,3, or 5, but usually in wave 3 for stocks and wave 5 for commodities

2.

Extensions must include subdivisions

3.

Extensions show up in the same time frame but subdivisions show up on smaller time frames

4.

Extended waves cannot be drawn as one wave

5.

Extended waves come as a part of one wave but not in two waves of the same Elliott cycle

6.

If wave 1 and 3 are equal then most probably wave 5 will be extended (Guidelines)

7.

If wave 3 is extended then most probably wave 1 and 5 are equal (Guidelines)

8.

If wave 3 is 100% Fibonacci projection then most probably wave 5 is extended (Guidelines)

Truncated Waves
Most probably if wave 3 is extended then wave 4 will correct deeply to 61.8% and wave 5 will be truncated.
Truncated wave only comes in the main wave 5 or in the 5th sub-wave of an extended wave 5
A truncated fifth wave does not move beyond the end of the third wave or with a short weak non significant
distance.
Truncated wave 5 shows at the end of a bull/bear market.
Leading Diagonal
Leading diagonals waves are motive extended waves that comes as the first wave of Motive or Corrective
waves [Or] inside at the beginning of an extended wave
Rules and Guidelines for Leading Diagonal waves:
1.

It is a motive extended wave with structure 5,3,5,3,5

2.

It comes either as wave 1 or A

3.

wave 4 overlaps wave 1

4.

If it comes after wave C then it is wave 1

5.

If it comes after wave 5 then it is wave A

Ending Diagonal
Ending diagonals waves are motive extended waves that comes as the last wave of Motive or Corrective waves
[Or] inside at the end of an extended wave
Rules and Guidelines for Leading Diagonal waves:
1.

It is a motive extended wave with structure 3,3,3,3,3

2.

It comes either as wave 5 or C

3.

wave 4 overlaps wave 1

4.

If it comes after wave 3

5.

If it comes after wave b

Elliott Corrective Waves

They are not trend correction but they are Elliott corrective structures. They are of 3 waves structure and
that are mainly of 3 types
1.

Zig-Zag

2.

Flat

3.

Triangles

Zig-Zags
Its structure is of 5-3-5 and comes as a steep move and wave a & c must be motive waves
Flats
Its structure is of 3-3-5 and they are of 3 types:
1.

Regular Flat
Wave a, b, and c are almost the of the same size.
It looks like a sideways rectangle.

2.

Expanded Flat
Wave b may bypass wave a top and wave c may bypass wave a bottom.
It looks like an inverted or broadening triangle.

3.

Running Flat
Wave b bypass the top of wave a but wave c does not reach or bypass the bottom of wave a.
It looks like a rising or falling channel.

Triangles
Its structure is of 3-3-3-3-3. This is the only exception in Corrective waves as it consists of 5 waves but doesn't
include the rules of motive waves and they are of 4 types:
1.

Ascending Triangle

2.

Descending Triangle

3.

Symmetric Triangle

4.

Inverted Triangle

Complex Combination
It is a formation of more than one corrective wave and it usually happens when the time and ratio of prices
are not met.

Elliott Waves Alternations

1.

2.

General
o

It warns the analysts to expect a difference in the next wave expression found in the same
Elliott cycle

It does not tell what will happen but what not to expect making the analyst keen on what is
going to come.

It warns the analyst that the next market cycle is not going to behave in the same manner as
the previous one.

It warns the analyst that the market will be a of a different habit opposed to what many
investors may think.

Impulse waves
o

If wave 2 was sharp (50% or 61.8% Fibonacci Retracement)then wave 4 is expected to be

flat (38.2% Fibonacci Retracement) and vice versa

3.

4.

If wave 3 is extended then wave 5 & 1 tend to be equal in length. If Wave 5 is extended then
wave 1 & 3 tend to be equal in length.

Corrective Waves
o

If wave 2 is sharp then it would find support at wave 2 of 1 and if it was flat then it would
find support at the Wave 4 of 5 if 5 was extended or at the main wave 4 itself if wave 5 was
not extended

If wave 4 is sharp then it would find support at wave 2 of 3 and if it was flat then it would
find support at wave 4 of 3

Wave 5
o

If wave 5 is extended then it would find support at wave 2 of 5

If wave 5 was not extended then it would find support at main wave 4 of the same degree

Elliott Waves Projections & Retracements

1.

2.

Impulse Waves
o

If wave 3 is 100% Fibonacci projection then wave 5 would be 161.8% or 261.8% projection

If wave 3 is 161.8% or 261.8% Fibonacci projection then wave 5 is expected to be of the

same length of wave 1

Corrective Waves
o

Wave B is expected to be 38.2% Fibonacci retracement in ZigZags.

Wave B is either 100% or 123.6% or 138.2% in Flats

Elliott Wave Degrees

Wave Degrees
Grand Super Cycle
Super Cycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Sub-Minuette

5 Waves Structure
[I] [II] [III] [IV] [V]
(I) (II) (III) (IV) (V)
I II III IV V
[1] [2] [3] [4] [5]
(1) (2) (3) (4) (5)
12345
[i] [ii] [iii] [iv] [v]
(i) (ii) (iii) (iv) (v)
i ii iii iv v

Elliott Wave Personalities

This is analyzed upon weekly charts especially for impulsive waves
Wave 1

3 Waves Structure
Bold [a] [b] [c]
Bold (a) (b) (c)
Bold a b c
[A] [B] C]
(A) (B) (C)
ABC
[a] [b] [c]
(a) (b) (c)
abc

1.

Belief and unbelief that is corrects heavily

2.

Highly pessimistic and depression

3.

Questioning the market

4.

Catastrophic news as wars, political, and natural problems

5.

Bankruptcy and very bad financial reports

6.

Breadth indicators are not at high levels

7.

very low volume

8.

Only leading high chip stocks start to move

Wave 2
1.

Volume is less than that at wave 1

2.

More bad news and financial reports

3.

Most losers are out of the market

4.

No one wants to trade

5.

Psychology is too bad

6.

Some oscillators start to form positive divergence

Wave 3
1.

Belief and markup phase

2.

Market get strong and broad

3.

Technical and Fundamental reports start to agree together on market strength

4.

Best fundamental targets and positive technical price patterns

5.

Media and news are good and optimistic

6.

All stocks are in a rally

7.

Volume is too strong

8.

Breadth and Oscillators go to overbought zone and stay for a long time there

Wave 4
1.

This is the most predictable wave

2.

Most stocks are in short corrections and/or sideways

3.

Leading blue chips stocks start to form reversal patterns

Wave 5
1.

Market is in a greed state

2.

Most news even the non-specialized ones start to talk about the market

3.

Junk (cats & dogs) stocks start to outperform the leading blue chips stocks

4.

Credits and Margins are the maximum

5.

Non traders and non specialized people start to talk about the market

6.

Volume is goes into blow off or becomes less than wave 3

7.

Negative divergence to show up on oscillators and breadth indicators

8.

Formation of negative and reversal price patterns on many stocks

Tips n Tricks

Tips n Tricks :

People and News are only wrong in reversals

Markets are not random except that reversals are an act of random.

Elliott Waves Example

Elliott Waves Trading Strategy

Usually Elliotticians have more than one scenario (mostly two) upon which take profits, entry and exit entries
are set-up.