Guide to Identifying Waves 1 to 5 in Real-Time Market Analysis
Table of Contents
1. Introduction
2. Wave 1: The Starting Point
3. Wave 2: The Pullback
4. Wave 3: The Strongest Impulse
5. Wave 4: The Consolidation
6. Wave 5: The Final Move
7. Practical Tips for Real-time Analysis
8. Examples and Case Studies
1. Introduction
The Elliott Wave Theory provides a roadmap for understanding price movements in markets.
Identifying waves in real time can be challenging but rewarding.
This guide will walk you through practical steps to identify Waves 1 to 5, even in the middle of the
market.
2. Wave 1: The Starting Point
Wave 1 is the initial move in a new trend. Often, it starts at the end of a significant correction or
sideways market.
Key Characteristics:
- Typically occurs with moderate volume.
- News sentiment is often negative as it contrasts the prior trend.
Tools:
- Look for trendline breaks or initial upward/downward moves.
- Use RSI or MACD to spot divergences with the prior trend.
3. Wave 2: The Pullback
Wave 2 retraces a portion of Wave 1 but never goes below its starting point.
Rules and Guidelines:
- Often retraces 50-61.8% of Wave 1 using Fibonacci levels.
- Volume decreases compared to Wave 1.
- Price action is corrective, often forming zigzags.
4. Wave 3: The Strongest Impulse
Wave 3 is the most powerful and extended wave in the trend.
Key Traits:
- High volume and strong price movement.
- Often 161.8% or more of Wave 1 in length.
Indicators:
- Momentum indicators show strength.
- Breakouts occur, and new highs/lows are formed.
5. Wave 4: The Consolidation
Wave 4 is a corrective phase, often sideways or consolidating in nature.
Spotting Wave 4:
- Does not overlap the price range of Wave 1.
- Commonly forms triangles or flats.
- Volume decreases further.
6. Wave 5: The Final Move
Wave 5 completes the trend and often exhibits weaker momentum.
Traits:
- Divergences between price and indicators like RSI/MACD are common.
- Wave 5 is often equal to or shorter than Wave 3.
Tips:
- Look for exhaustion in price movement and volume.
7. Practical Tips for Real-time Analysis
1. Use Fibonacci retracements/extensions to map potential wave lengths.
2. Watch momentum indicators like RSI and MACD for divergences and confirmations.
3. Analyze volume patterns for clues about wave strength.
8. Examples and Case Studies
Example 1: Identifying Waves 1-5 in a bullish trend.
Example 2: Spotting a corrective Wave 2 in real time.
Example 3: Using Fibonacci and momentum to confirm Wave 5.
