Ralph Nelson Elliott Discovered Stock Prices Patterns
- 1930s discovered stock prices trend and reverse in recognizable patterns
- Repetitive in Form but not necessarilz in time and amplitude
- Isolated FIVE patterns or waves which occur in the market
- He described how they link to form the same pattern of the next larger size
- waves in waves in waves: The Wave Principle
The simple way to understand Wave principle is by understanding human social nature. Human social nature can be expressed in repetitive patterns that yield predictive powers due to greed, fomo and weak hands.
Sometimes the market reacts to outside news (FUD) or Hype but most of the time it does not
Waves are directional movement which leads to progression
Understanding the Basic Wave Patterns
The progression in markets take the form of 5 waves
There are two types of wave development: Motive & Corrective
The Motive Waves are 1,3,5 -> 5 Waves total
The Corrective Waves are 2,4 -> 3 Waves total
Each 5 Wave pattern consists of one Wave from a larger pattern. The chart below might help you visualise how all waves fit together to form larger and larger market cycles that last decades.
Each degree of the wave pattern has a different name and a different number.
- Grand Supercycle: multi-century
- Supercycle: multi-decade (about 40–70 years)
- Cycle: one year to several years (or even several decades under an Elliott Extension)
- Primary: a few months to a couple of years
- Intermediate: weeks to months
- Minor: weeks
- Minute: days
- Minuette: hours
- Subminuette: minutes
source: Elliott Wave by Excavo
A correct Elliott Wave count follow these three rules:
- Wave 2 never retraces more than 100% of wave 1.
- Wave 3 cannot be the shortest of the three impulse waves, namely waves 1, 3 and 5.
- Wave 4 does not overlap with the price territory of wave 1, except in the rare case of a diagonal triangle formation.
A common guideline called “alternation” observes that in a five-wave pattern, waves 2 and 4 often take alternate forms; a simple sharp move in wave 2, for example, suggests a complex mild move in wave 4. Corrective wave patterns unfold in forms known as zigzags, flats, or triangles. In turn these corrective patterns can come together to form more complex corrections. Similarly, a triangular corrective pattern is formed usually in wave 4, but very rarely in wave 2, and is the indication of the end of a correction.
A few more examples on correct and wrong ways to count elliott waves
If you’re looking for the next big coin, look for one that has had an impulse wave up, and has NEVER retraced back below that starting point. That is an indication of potential for healthy growth.
Parallel Channel and Elliott Wave Counting
The base channel contains the origin of wave one, the end of wave two, and the extreme of wave one.
The base channel is most important, because it defines the trend.
The acceleration channel encompasses wave three.
Once prices break through the lower boundary line of the acceleration channel, we have confirmation that wave three is over and that wave four is unfolding.
The deceleration channel contains wave four.
To draw the deceleration channel, simply connect the extremes of wave three and wave (B) with a trend line.
Take a parallel of this line, and place it on the extreme of wave (A).
A succesful trading example using Elliott Waves
In this situation I noticed that we were approaching the 5 wave of a pattern.
The RSI was showing bearish divergence and a loss of momentum. That was a few good signals to go into a short position.
My Exit from this position was found by setting buy orders to close my short position around the 0.5 fibonacci level. I plotted the fibonacci levels by placing the first point on the last lowest candle wick and the highest recent candle wick
I hope you find this guide useful.
Have a great day