Elliott Wave Courses

Elliott wave theory has been around for many decades. Ralph Nelson Elliott first used it in the 1930s, though it wasn’t published until the 1970s, in the book “Elliott Wave Principle” written by Prechter and Frost.

The theory builds its foundations directly on Dow Theory. In fact, Elliott said his wave principle was a necessary complement to Dow Theory, since Dow referred to the motion of the sea when he described price movements — so Elliott chose to call price movements “waves,” which is now known as Elliott waves.

Basics of Elliott Wave Cycles:

The basics of the theory are quite simple. In its basic form, Elliott simply said that stock market prices follow a repeating pattern of a five-wave advance followed by a three-wave decline. A “wave” in this context is any single price move up or down, so the basic chart of Elliott wave theory looks like the diagram below.

The five advancing waves are numbered 1 through 5, and the three-wave decline is labeled with the letters A, B, C. Waves 1, 3, and 5 move in the direction of the main trend and are called impulse waves, while waves 2 and 4 correct against an uptrend and are called corrective waves. In a downtrend, waves A and C move in the direction of the trend and are impulse waves, while wave B is the corrective wave.

Elliott didn’t claim this five-wave pattern was the only shape possible, but it was later confirmed by Frost and Prechter and became generally accepted. So the basic premise of Elliott wave theory is that every move in the direction of the price trend is made up of five waves — waves 1 through 5 — followed by a three-wave correction.

Of course, if Elliott wave theory stopped there, it would be simple enough that it probably wouldn’t have attracted as large a following as it has today.

But the crucial next step is the idea that this pattern is fractal — you may know the term “multifractal” if you’ve read about modern chaos theory — and each of the main waves can be broken down into waves of a lesser degree. That means waves 1 and 2 are themselves made up of five smaller waves and three smaller waves respectively, and if you break down all the original waves this way, you get the pattern below:

Each of these waves can, in turn, be broken down again into much smaller waves. Or, viewed the other way, the original pattern is itself just two waves of a larger Elliott wave pattern.

You can also scale the pattern up and down, and Elliott gave names to each of these pattern sizes. They range from the Grand Supercycle — which may include 100 waves or more — down through the Supercycle, Cycle, Primary, Intermediate, and Minor wave degrees, all the way to the sub-wave category, which may last only a few minutes. You don’t need to memorize all these names; in your own trading you’ll most likely only deal with the intermediate and minor classifications.

Types of Elliott Waves

Overall, Elliott waves are divided into two types:

• Impulsive
• Corrective

Under each type there are several further sub-patterns, such as the zigzag, the triangle, the diagonal, and others.

Conditions of Elliott Waves:

• A correction never takes five waves.
• If you see five waves, the first wave is likely the start of a larger decline of three waves — otherwise it may warn of a change in trend.
• A cycle isn’t complete until both the five impulse waves and the three corrective wave patterns have been traced out.
• You measure a wave by its size on the chart, not by time.
• Wave 3 in a five-wave move is usually the longest one, and it is never the shortest.
• Among waves 1, 3, and 5 — the impulse waves — two of them tend to be equal in length, usually waves 1 and 5, but not always.
• Waves 2 and 4 also tend to be similar in length to each other.
• The low of wave 4 should not drop below the low of wave 2; otherwise your wave count is wrong.
• Waves 1 and 4 are often equal, and so are waves 2 and 5.
• In a corrective move, waves A and C usually tend to be equal.
• A three-wave correction is usually about a third of the length of the preceding five-wave sequence, and the correction often stops near the low of wave 4.

Finally, there are many more guidelines to the concept of Elliott wave cycles beyond this simplified version, but they’re meant to help you correctly identify the stages of a wave pattern when you’re looking at a chart in the forex markets.

So this article has been a simplified explanation of the concepts, conditions, and basics of Elliott wave cycles, a theory built on the foundation of Dow Theory decades ago, to help you interpret price waves as you trade the forex markets.

Note: there is an indicator that draws Elliott waves automatically, but it’s better not to rely on it, since it isn’t accurate and produces many incorrect readings.

[AFF-CTA: pending]

FAQ

What is wave analysis?

Generally, wave analysis is used to estimate the likely direction of a financial market’s movement by reading the rising and falling waves in price action, which helps traders and investors make buy or sell decisions. That said, it’s worth keeping in mind that wave analysis doesn’t always lead to an accurate read on market movement.

How do you draw Elliott waves?

To draw Elliott waves, you need to identify the pattern you’re looking for and understand price formations and time frames. Charts can be used to apply Elliott wave theory effectively.

Here are the general steps for drawing Elliott waves:

Identify the target pattern: using Elliott wave theory, you need to identify the overall pattern you expect, whether an upward or downward pattern.

Analyze the price data: you need to analyze prices in the market you’re interested in, using candles and various charts to identify the pattern you’re looking for.

Identify and mark the waves: using the agreed-upon criteria in Elliott wave theory, you can identify and mark the rising and falling waves and determine the pattern the market is following.

Build the chart: you use the information you’ve gathered from the price analysis and wave identification to build out the chart.

How many Elliott waves are there?

Elliott wave theory assumes 8 waves in total, split between advancing and declining waves. These waves are arranged in a sequential, logical order and represented with specific numbers and letters under the system this theory follows. Applying this theory correctly and logically is key to understanding and analyzing financial market movement.

It’s also worth checking other references and experts in this field for more details and analysis on Elliott wave theory.

Related articles

• Elliott Wave for Beginners
• Nelly Elliott Wave Indicator
• Elliott Wave Time Analysis
• Gann Time Cycles