Elliott Wave Theory

The Elliott Wave Theory, developed by Ralph Nelson Elliott in the 1930s, is a form of
technical analysis that aims to forecast market trends by identifying recurring wave
patterns. Elliott, an accountant by profession, observed that markets move in predictable,
repetitive cycles based on investor psychology and crowd behavior. After years of
studying market data, he proposed that price movements are not random but follow a
structure of waves—a concept he believed reflected the natural rhythm of mass
psychology. His work, later, became foundational in technical analysis, highlighting that
markets alternate between phases of optimism and pessimism, which create these wave
patterns.

Elliott's theory describes two main types of waves: Impulse Waves and Corrective Waves.
Impulse waves move in the direction of the main trend and consist of five sub-waves—
three in the direction of the trend and two pullbacks. These waves typically mark the
strongest price movements, occurring when investors are most confident in the trend.
Corrective waves, on the other hand, move against the prevailing trend and are
structured as three sub-waves. They tend to be weaker, representing temporary
pullbacks or consolidations. This wave structure is fractal, meaning each impulse and
corrective wave can contain smaller waves, creating a self-similar pattern across
different time frames.
Pros of Elliott Wave Theory

Predictive Power: Helps traders identify potential trend reversals and continuation
points.
Fractal Nature: Can be applied across time frames, making it versatile for both short-
and long-term analysis.
Insight into Market Psychology: Offers a unique perspective on investor sentiment.

Cons of Elliott Wave Theory

Subjectivity: Counting waves can be complex and is open to interpretation, often

leading to inconsistency.
Difficulty in Application: Requires experience and practice to accurately identify
wave patterns.
Reliance on Complementary Tools: Works best when used with other indicators for
confirmation, as it can be less reliable on its own.

Elliott Wave Theory remains a powerful tool for those who understand its structure and
nuances, offering a distinctive way to interpret and anticipate market behavior.

Elliott Impulsive Waves

The Elliott Impulse Wave pattern, also known as Motive Wave, is a core concept in Elliott
Wave Theory that describes price movements in the direction of the main trend. This
pattern consists of five waves: three in the direction of the trend (waves 1, 3, and 5) and
two corrective waves (waves 2 and 4) that move against it. The purpose of the impulse
wave is to advance the market in the direction of the main trend, making it a critical tool
for traders to identify when a trend is strong and sustainable.

Motive Waves vs. Corrective Waves

Motive Waves: These waves move in the direction of the main trend and consist of five
sub-waves. They are powerful, showing strength in the trend and typically marking
 key movements within that trend.
Corrective Waves: These move against the primary trend and consist of three sub-
waves, showing temporary retracements or pauses in the trend rather than a
reversal.

Characteristics of Impulse Waves

Impulse waves follow specific rules to maintain the structure and integrity of the pattern:

1. Wave 2 cannot retrace more than 100% of Wave 1.

2. Wave 3 is usually the longest wave and can never be the shortest among Waves 1, 3,
and 5.
3. Wave 4 does not overlap with Wave 1, except in cases of some diagonal structures.

Breakdown of Each Wave (Wave 1 to Wave 5)

Wave 1: This is the initial wave in the direction of the new trend, often a result of
fundamental changes or early optimism. It may not attract much attention at first, as
the market sentiment is still transitioning from the previous trend.
Wave 2: Wave 2 is a corrective wave that retraces a portion of Wave 1. Traders who
missed the initial move may enter here, assuming the market will go lower, but Wave
2 typically doesn’t fully retrace Wave 1. This wave reflects residual caution or
skepticism about the new trend.
Wave 3: The most powerful and extended wave, Wave 3 often sees high volume and
significant price movement as the new trend gains widespread attention. This wave
attracts the most participants, as optimism and momentum drive prices higher.
Wave 3 typically exceeds the end of Wave 1.
Wave 4: This is a corrective wave that pulls back some of the gains of Wave 3. It’s
often marked by low trading volume and tends to be less volatile. Traders who
recognize the trend may see Wave 4 as an opportunity to enter before the final wave
up.
Wave 5: The last wave in the impulse sequence, Wave 5 is often driven by final bursts
of enthusiasm or speculative buying. Prices reach new highs, but momentum may be
weaker compared to Wave 3, indicating that the trend is nearing its peak. The end of
Wave 5 often signals a potential trend reversal or the beginning of a corrective
pattern.

Identifying the Start and End of an Impulse Wave

To identify the start of an impulse wave, look for strong movements in the direction of the
trend that align with the rules of impulse waves. Wave 1 usually starts with a significant
price change, indicating a potential trend shift. High volume and increasing momentum
in Wave 3 are strong indicators that the impulse wave is in motion.

The end of an impulse wave typically occurs at the peak of Wave 5, where the price
movement begins to weaken. Momentum indicators, such as the RSI or MACD, may show
divergence (e.g., price makes a new high while momentum does not), signaling the trend
could be losing strength. The presence of lower trading volume or waning interest can
also indicate the end of the impulse wave and the beginning of a corrective phase.

Elliott Corrective Waves

The Elliott Corrective Waves represent price movements that occur against the main
trend and follow an impulse wave. Corrective waves are more complex than impulse
waves and generally consist of three sub-waves: one wave that moves against the main
trend, followed by a smaller move in the direction of the main trend, and a final wave
moving against it again. These corrections signify temporary pauses or retracements
rather than reversals and help the market consolidate before the next impulse wave.

Characteristics of Corrective Waves

Corrective waves are marked by less momentum and often exhibit lower volume than
impulse waves. These waves tend to be more complex in structure, showing a lot of
variability in length and pattern. While impulse waves follow strict rules, corrective waves
are more flexible, although they generally follow the patterns mentioned above.

Breakdown of Each Wave in the Corrective Sequence (Waves A, B, and C)

Wave A: This wave moves against the main trend, catching some investors by
surprise as it indicates the beginning of a temporary counter-trend. Many still believe
the previous trend is intact, so Wave A is often seen as a minor pullback rather than a
true reversal.
Wave B: Wave B is a corrective move in the direction of the main trend. It’s often
weaker and lacks the strength to reach the previous highs of the main trend. Many
investors mistakenly view this as a resumption of the primary trend, only for the final
correction to follow.
Wave C: Wave C is the last wave in the corrective sequence and usually marks a
stronger movement against the primary trend. It often completes the correction and
can be similar in strength to Wave A. Once Wave C finishes, it often signals the start of
a new impulse wave in the original direction of the trend.

Identifying the Start and End of a Corrective Wave

The start of a corrective wave can be identified after a five-wave impulse sequence,
usually marked by decreased volume, slowing momentum, and possible signs of market
exhaustion. When an impulse wave ends, indicators like RSI or MACD may show
overbought conditions, signaling a likely corrective phase.

The end of a corrective wave generally occurs when the structure of the corrective
pattern (such as ABC in a zigzag) is complete. Indicators like volume and momentum can
also help; corrective waves often end when volume drops, and there is bullish divergence
on momentum indicators (like the price making new lows while momentum indicators
rise). This shift can indicate the market is ready to resume its primary trend, leading into a
new impulse wave.
 Elliot triangle Waves
An Elliott Triangle is a corrective wave pattern in Elliott Wave Theory that represents a
period of consolidation within the main trend. It appears when the market takes a
temporary pause, indicating that buyers and sellers are in relative equilibrium. Typically,
triangles form in the fourth wave of an impulse sequence or in the B wave of an A-B-C
corrective sequence, signaling that the main trend will likely resume once the triangle
completes.

Characteristics of an Elliott Triangle

1. Five Sub-Wave Structure (A-B-C-D-E): Triangles have five sub-waves, labeled A

through E
2. Converging Trendlines: Each wave creates a point of reversal, with trendlines drawn
from the peaks and troughs converging, forming a triangle. In rare cases, triangles
can expand, forming a broadening pattern.
3. Reduced Momentum and Volume: As the triangle develops, trading volume typically
decreases, reflecting market indecision and a lack of strong buying or selling
pressure.
4. Position in the Trend: Triangles are most commonly found in the fourth wave of an
impulse sequence or as the B wave in an A-B-C correction, rarely in wave 2.

How to Identify an Elliott Triangle

To identify a triangle, look for these signs:

1. Sideways Movement: The price begins to consolidate within a narrowing range after
a strong directional move.
2. Five-Wave Structure: Ensure the pattern has five waves (A-B-C-D-E), each consisting
of three sub-waves.
3. Converging Trendlines: Draw trendlines from the peaks and troughs of the waves. In
most cases, the lines will converge, forming a triangle.
When Is an Elliott Triangle Formed?

Triangles generally form:

In the fourth wave of an impulse sequence (waves 1, 2, 3, 4, and 5), just before the
final wave in the direction of the main trend.
As the B wave in an A-B-C correction, often indicating a continuation of the prior
trend.

Interpretation of an Elliott Triangle

An Elliott Triangle indicates that the market is consolidating before making a final move in
the direction of the main trend. It signals that the trend is likely to resume after the
triangle completes. For example:

If a triangle forms as the fourth wave in an upward trend, it suggests that a fifth wave
up will follow.
If it appears as the B wave in an A-B-C correction, it implies that a C wave will follow,
continuing the correction.

Triangles are reliable signals of trend continuation and can help traders position
themselves for the upcoming breakout once the E wave completes.

Elliott Double Combo Waves

In Elliott Wave Theory, a Double Combo (also called a “W-X-Y” pattern) is a corrective
wave structure composed of two simpler corrective patterns linked by an intervening
wave, labeled "X". This pattern appears when a simple correction like a zigzag, flat, or
triangle fails to adequately correct the prior move and is thus combined with another
corrective pattern to complete the correction. Double Combos are commonly used in
place of simple corrections in complex markets, often seen in sideways or range-bound
conditions.
Structure of the Double Combo (W-X-Y)

A Double Combo follows a 3-3-3 structure, where:

W is the first corrective pattern, which could be a zigzag, flat, or triangle.

X is the connecting wave between the two corrective patterns, typically a smaller
counter-trend move.
Y is the second corrective pattern, which could also be a zigzag, flat, or triangle but
must be different from W.

Each of these waves—W, X, and Y—has a three-wave structure (A-B-C). The purpose of
the Double Combo is to extend the duration or complexity of a corrective phase, often
seen in prolonged consolidations.

Characteristics of a Double Combo

1. Three-Wave Components: Each segment (W, X, Y) consists of three waves, making it

a 3-3-3 pattern.
2. Complex Corrective Structure: Double Combos are often seen in markets where
simple corrections (like a single zigzag or flat) aren’t enough to offset the prior move.
3. Sideways Movement: The Double Combo often reflects a sideways correction rather
than a sharp retracement, indicating that the market may be consolidating before
resuming the main trend.

Elliott Triple Combo Waves

In Elliott Wave Theory, a Triple Combo (or W-X-Y-X-Z pattern) is an advanced corrective
wave pattern that involves three corrective structures connected by two intervening X
waves. A Triple Combo occurs when the market needs a more complex and extended
correction beyond a Double Combo (W-X-Y). This pattern generally reflects a prolonged
consolidation phase with little directional movement, creating a series of sideways,
overlapping waves that combine various corrective structures such as zigzags, flats, and
triangles.

Structure of the Triple Combo (W-X-Y-X-Z)

The Triple Combo pattern consists of three main corrective waves (W, Y, and Z), each
connected by smaller X waves:

W: The first corrective structure, often a zigzag, flat, or triangle.

X: The connecting wave between W and Y, typically a small three-wave correction.
Y: The second corrective structure, differing from W, such as a flat if W was a zigzag.
X: The second connecting wave, another three-wave correction between Y and Z.
Z: The final corrective structure, which can be any corrective pattern that has not
appeared in W or Y.

Each of the components in the pattern (W, X, Y, X, Z) follows a three-wave (A-B-C)

structure. This makes the Triple Combo complex and challenging to identify, as it includes
a total of five corrective sub-waves connected by two X waves.

Characteristics of a Triple Combo

1. Three Distinct Corrective Patterns: Each corrective wave (W, Y, Z) is a different

pattern, such as a zigzag, flat, or triangle, though there may be some repetition
depending on market behavior.
2. Five Sub-Wave Structure: The pattern contains five segments (W-X-Y-X-Z), making it
more complex and time-consuming to complete than a simple or double correction.
3. Sideways and Overlapping Price Action: Triple Combos typically occur in range-
bound or consolidating markets, with prices moving mostly sideways and
overlapping within a defined range.
4. Extended Correction: This pattern signals a lengthy consolidation phase, where the
market is neither in a strong uptrend nor downtrend, often frustrating traders looking
for clear direction.

How to Identify a Triple Combo

To identify a Triple Combo, look for:

1. Three unique corrective patterns connected by two X waves.

2. Five distinct components (W-X-Y-X-Z), each with an internal three-wave A-B-C
structure.
3. Extended sideways movement with no clear trend direction, often in markets that are
consolidating after a major trend.

When Does a Triple Combo Form?

A Triple Combo typically forms:

In prolonged sideways markets where a single or double correction is insufficient.

During complex corrections, where the market is experiencing extended consolidation.
 In larger-degree corrections, like in wave 4 of a primary trend or in wave B of a larger
corrective sequence.

Interpretation of a Triple Combo in Trading

A Triple Combo suggests that the market is undergoing a long period of indecision and
consolidation before the main trend resumes. It indicates that strong directional moves
are unlikely until the pattern completes. Traders generally avoid trading within a Triple
Combo due to its complexity and lack of clear direction. Once the Z wave completes, the
market often resumes the original trend, so traders wait for the final leg of the Triple
Combo to finish before considering positions in the direction of the main trend

Fractals: Elliott Waves Within an Elliott Wave

Fractals are structures or patterns that are self-similar at different scales. In fractals,
each part of the structure resembles the whole, regardless of how zoomed in or out we
observe it. This concept shows how intricate complexity can emerge from repeating
simple rules or patterns over different scales. The philosophy behind fractals suggests
that many seemingly complex structures in nature are formed through the repetition of
basic shapes, creating patterns within patterns. This self-similar structure is present in
natural forms like trees, coastlines, mountains, and clouds, demonstrating the underlying
order in what initially appears chaotic.

Fractals in Nature: Example of a Tree Branch

Consider a tree branch to understand the concept of fractals:

 1. Main Trunk: The tree starts with a main trunk, which represents the whole structure.
2. Primary Branches: The trunk splits into primary branches. These branches are similar
in shape and function to the main trunk but smaller in size.
3. Secondary Branches and Twigs: Each primary branch splits into secondary branches
or twigs. These twigs resemble smaller versions of the trunk and primary branches,
with their own branches extending outward.
4. Leaves and Veins: At the smallest scale, each leaf has veins branching out in a
pattern similar to the structure of the tree.

At each level, from the trunk down to the veins in a leaf, the pattern is self-similar—each
part reflects the whole structure. This fractal nature allows the tree to efficiently grow and
optimize surface area for photosynthesis. By repeating the branching structure at
different levels, the tree maximizes its ability to absorb sunlight, showing how fractals
serve a functional purpose in nature.

Fractals in Elliott Wave Theory

In Elliott Wave Theory, price movements in financial markets are thought to follow fractal
patterns similar to those observed in nature. Elliott Wave Theory suggests that market
trends unfold in repetitive cycles, where each cycle consists of impulse and corrective
waves that form smaller patterns mirroring the larger trend. This concept of fractals
explains how markets move in waves within waves, creating self-similar structures
across different timeframes.
Example of Fractals in Elliott Waves

1. Impulse Wave Cycle: In an uptrend, the market typically moves in a five-wave

structure, called an impulse wave. This main impulse wave consists of smaller waves
that reflect the entire five-wave pattern.
2. Nested Waves: Each wave within the larger impulse structure contains smaller waves
that replicate the larger pattern. For example, Wave 1 of the main five-wave structure
will have its own five smaller waves moving in the direction of the main trend, while
Wave 2 will have a corrective pattern.
3. Self-Similarity Across Timeframes: The fractal nature of Elliott Waves allows the
same patterns to appear on different timeframes. A daily chart might show a five-
wave structure, while a shorter timeframe, like a one-hour chart, would display the
same five-wave pattern within each segment of the daily structure.

This fractal quality helps traders understand market trends across different scales,
revealing that the same principles govern short-term fluctuations and longer-term
trends. By recognizing the fractal nature of market movements, traders can make
decisions based on patterns that repeat within larger waves, helping them anticipate
potential reversals or continuations in the trend.

Why Fractals Matter in Elliott Wave Analysis

The fractal philosophy in Elliott Wave Theory gives traders insight into market
psychology, showing how crowd behavior repeats in patterns across different
timeframes. Recognizing these self-similar patterns helps traders to:

Identify trends and reversals: By understanding where a smaller wave fits into a
larger wave structure, traders can predict the trend’s direction.
Make multi-timeframe analyses: Fractal structures allow traders to apply Elliott
Wave analysis across short-term and long-term charts, gaining a broader
understanding of market dynamics.
 Anticipate corrections and breakouts: Since Elliott Waves are fractal, a small
corrective pattern on one timeframe might be part of a larger wave, signaling a
potential breakout or trend continuation.

Thus, fractals in Elliott Wave Theory provide a layered understanding of market trends,
showing that even minor fluctuations reflect broader market psychology, repeating
patterns that allow for structured analysis and strategic decision-making.

How to trade using Elliott Waves

Trading with Elliott Wave Theory involves identifying market patterns to anticipate
potential price movements and to pinpoint high-probability entry and exit points. Elliott
Wave Theory is based on the concept that financial markets move in predictable wave
patterns, known as impulse and corrective waves. By recognizing these wave structures,
traders can forecast market direction and make informed decisions about where to enter,
exit, or stay out of trades.

Here’s a step-by-step approach to trading using Elliott Wave Theory:

Identifying the Current Wave Structure

The first step is to determine the current wave structure in the market. Elliott Wave Theory
is based on five-wave impulse patterns followed by three-wave corrective patterns:

Impulse Waves (1-2-3-4-5): A five-wave structure that moves in the direction of the
main trend.
Corrective Waves (A-B-C): A three-wave structure that moves against the main
trend as a counter-trend retracement.

Use multiple timeframes to confirm the pattern, ensuring that the current wave structure
aligns with the main trend on a larger scale.

Labeling Waves Accurately

Correctly labeling waves is essential to apply Elliott Wave Theory effectively:

Identify the starting point of the five-wave sequence.

Label waves 1 through 5 for impulse moves, following the trend.
Label waves A, B, and C for corrective moves, moving against the trend.

Wave Characteristics:

Wave 1 usually initiates the trend but may not always have strong volume.
Wave 3 is often the most extended and powerful, showing strong price movement
with high volume.
 Wave 5 represents the final move in the trend and may lack the strength of Wave 3,
often signaling exhaustion.

By accurately labeling waves, traders can better determine which phase the market is in
and where it’s likely to go next.

Setting Entry Points Based on Wave Analysis

Each wave offers a specific opportunity for entry, depending on the current wave count
and market direction.

Entering on Wave 2 or 4 (Corrective Waves): These waves are typically counter-trend

retracements, offering entry opportunities in the direction of the main trend.
Example: After a strong Wave 1, wait for the Wave 2 correction. Once the correction
appears to finish (often retracing 50%–61.8% of Wave 1), enter in the direction of the
main trend.
Entering on Wave 3: Wave 3 is typically the most powerful and profitable wave. After
confirming the completion of Wave 2, traders can enter at the beginning of Wave 3,
aiming to ride the strongest part of the trend.
Entering on Wave 5: Wave 5 often completes the impulse sequence. This wave may
provide entry opportunities but with caution, as it’s the final wave in the trend. Some
traders prefer to wait for the start of the corrective A-B-C sequence after Wave 5 for a
new entry.

4. Using Fibonacci Levels for Confirmation

Fibonacci retracement and extension levels can help confirm Elliott Wave patterns:

Wave 2 often retraces between 50%–61.8% of Wave 1.

Wave 3 is typically 161.8% of Wave 1 in length, indicating a strong trend continuation.
Wave 4 often retraces between 23.6%–38.2% of Wave 3.
Wave 5 frequently extends to 100% of Wave 1 or 61.8% of Wave 3.

Fibonacci levels provide checkpoints where price movements are likely to reverse or find
support/resistance within the wave structure.

Setting Stop-Loss and Take-Profit Levels

Stop-Loss Placement:

Wave 2: Set the stop loss below the start of Wave 1, as Wave 2 cannot fully retrace
Wave 1.
Wave 4: Place the stop below the start of Wave 3, as Wave 4 should not overlap Wave
1 in a standard impulse.

Take-Profit Levels:

For Wave 3, set a take-profit target at the 161.8% Fibonacci extension of Wave 1.
 For Wave 5, take profit at potential reversal areas or when momentum wanes, using
tools like RSI or MACD divergence to gauge exhaustion.

Using Technical Indicators for Confirmation

Elliott Wave Theory works best with complementary indicators to confirm wave counts:

Momentum Indicators (RSI, MACD): These indicators help confirm impulse waves
(often accompanied by strong momentum) and identify wave exhaustion, especially
at Wave 5.
Volume Analysis: High volume on Waves 1 and 3 signals strong trend continuation,
while decreasing volume on Wave 5 can indicate a potential trend reversal.

Successful Elliott Wave trading requires practice in recognizing wave patterns on real and
historical charts. Reviewing past price movements can improve your ability to accurately
label waves and recognize patterns in live markets.

Summary of Trading Steps with Elliott Wave Theory

1. Identify and label the current wave structure (1-2-3-4-5 for impulse, A-B-C for
correction).
2. Choose entry points based on corrections (Wave 2 or Wave 4) or trend continuation
(Wave 3).
3. Use Fibonacci levels to confirm wave length and target areas.
4. Set strategic stop-loss and take-profit levels based on the wave count and
support/resistance levels.
5. Confirm entries with additional technical indicators (momentum, volume).
6. Continuously practice to sharpen wave identification skills.

Elliott Wave Theory offers powerful insights, but it requires skill and practice to master. By
understanding wave structures and combining them with other analysis tools, traders
can make informed decisions on market entries and exits.