Comprehensive Guide to Elliott Wave Theory
Table of Contents
1. What is Elliott Wave Theory?
2. What is the Market Cycle?
3. Rules for Elliott Wave Patterns
4. Impulse Waves & Corrective Waves
5. Channeling
6. Extensions
7. Truncation
8. Diagonal Patterns
9. Expanding Patterns
10. Triangle Patterns
11. Zigzag Patterns
12. Flat Patterns
13. Combination Patterns
14. Time Calculation
1. What is Elliott Wave Theory?
Elliott Wave Theory, developed by Ralph Nelson Elliott, describes how market prices move in
repetitive patterns or waves due to crowd psychology.
Key Points:
- Waves are fractal in nature.
- They can be used to predict future price movements.
2. What is the Market Cycle?
The market cycle consists of periods of expansion and contraction, divided into:
1. Impulse Waves: Move in the direction of the main trend (5-wave structure).
2. Corrective Waves: Move against the main trend (3-wave structure).
3. Rules for Elliott Wave Patterns
1. Wave 2 cannot retrace more than 100% of Wave 1.
2. Wave 3 is never the shortest of Waves 1, 3, and 5.
3. Wave 4 does not overlap the price territory of Wave 1 (except in diagonal patterns).
4. Impulse Waves & Corrective Waves
Impulse Waves: 5 waves moving in the direction of the trend (1, 2, 3, 4, 5).
Corrective Waves: 3 waves against the trend (A, B, C).
5. Channeling
Use trendlines to connect waves for better visualization.
Channels often occur in Waves 1-5 and A-C.
6. Extensions
Occur when one wave (usually Wave 3) is elongated compared to others.
7. Truncation
A truncated Wave 5 fails to exceed the end of Wave 3, indicating weakness in the trend.
8. Diagonal Patterns
Occur in Waves 1 or 5.
Types: Leading diagonals (Wave 1) and Ending diagonals (Wave 5).
9. Expanding Patterns
Larger waves as the pattern progresses, often seen in corrective structures.
10. Triangle Patterns
Sideways corrections with 5 waves (A-B-C-D-E).
Types: Symmetrical, ascending, descending, and expanding triangles.
11. Zigzag Patterns
Sharp corrections consisting of A-B-C waves.
Wave A and C move in the same direction.
12. Flat Patterns
Sideways corrections where Waves A, B, and C are nearly equal in length.
13. Combination Patterns
Complex corrections combining zigzags, flats, or triangles.
14. Time Calculation
Use Fibonacci time zones to estimate when the next wave might occur.
