Elliott Wave Theory Counts and Waveforms

The Wave Principle would be easy if the Wave forms would be ideal. Unfortunately in the real world the market behavior is not usually ideal. Every wave functions as either an action or a reaction. A wave may either benefit the general trend or interrupt it. A wave that trends in the same direction as the general trend is known as an actionary or trend wave. A wave that moves in the opposite direction to the general trend is known as a reactionary or countertrend wave.

Assumptions of Elliot Wave Theory:

• The market is not efficient
• It is a true free market (i.e., prices are set by the consumer's beliefs)
• It provides consistent and standard metrics that can be measured.
• It is manipulated by a statistically significantly large group of people.
  

The interpretation of the Elliott Wave Theory is as follows:

• Every action is followed by a reaction.
• There are five waves in the direction of the main trend followed by three corrective waves (a "5-3" move).
• A 5-3 move completes a cycle.
• This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
• The underlying 5-3 pattern remains constant, though the time span of each may vary.

 

Elliott Wave Count Rules

Based on the market pattern, we can identify 'where we are' in terms of wave count. Nevertheless, as the market pattern is relatively simplistic, there are several rules for valid counts:

• A completed cycle consists of a 5-3 pattern.
• Waves are measured by distance covered on the chart (by price).
• Wave 2 should never break below the beginning of wave 1.
• Wave 3 in an impulsive 5-wave move is usually longer and never shorter than waves 1 and 5.
• Two of the Three impulses in a 5-wave sequence tend toward equality, usually waves 1 and 5.
• Waves 2 and 4 tend toward equality.
• The bottom of wave 4 should not penetrate the bottom of wave 2.
• Often, but not always, wave 4 is equal to wave 1.
• Often, but not always, wave 5 is equal to wave 2.
• Waves A and C tend toward equality.
• Wave B of the ABC correction must never penetrate below the bottom of wave A.
• ABC Corrections typically retrace one third of the previous 5-wave sequence. ABC corrections tend to stop at the bottom of wave 4 in an upward trend and the top of wave 4 in a downward trend.

 

Wave forms in Impulse Wave

Some major types of Elliott Wave wave forms in an Impulse Wave:

Extension

Most impulses contain what Elliott called an extension. 'Extension' means the wave is elongated and sub-waves are conspicuous in relation to waves of higher degree. Basically, an extension is an elongated impulse with exaggerated subdivisions. Among Wave 1, 3 and 5, only one should unfold into an extended wave.

See following extension patterns:

Notice in the last example there are actually three Elliott Waves in the graph, each of a different degree. This happens quite frequently in the real world market. Of course, these extensions may develop in a rising or falling sequence. They are valid in either up trends or down trends.

 

Diagonal Triangles

Fourth waves frequently show consolidation and often take the form of triangles or pennants on the chart. Sometimes, the momentum at Wave 5 is so weak that the 2nd and 4th sub-waves overlap with each other and evolved into diagonal triangle.

Triangles represent the relative balance between Bulls and Bears in a market showing indecision about when the fourth wave correction should be taking place. Or in some cases momentum falters, especially in a highly overbought or oversold market and triangles start forming on the fifth wave.

 

5th Wave Failure

In some circumstances, Wave 5 is so weak that it fails to progress past wave 3, causing a double top at the end of the trend. Elliott called it a Failure, but it is also known as a truncated or abbreviated wave. Such cases are rare, but when visible it indicates that a market has prematurely lost strength and momentum or that a market that was previously weak has suddenly gained buying interest, depending on original trend direction:

 

Wave Forms in Corrective Wave

Corrective Wave forms are basically categorized into six major wave forms:

1. Zig-Zag : abc pattern composed of 5-3-5 sub-wave structure.
2. Flat : abc pattern composed of 3-3-5 sub-wave structure, with b equals a. 
3. Irregular : abc pattern composed of 3-3-5 sub-wave structure, with b longer than a. 
4. Horizontal Triangle : 5-wave triangular pattern composed of 3-3-3-3-3 sub-wave structure. 
5. Double Three : abcxabc pattern composed of any two from above, linked by x wave. 
6. Triple Three : abcxabcxabc pattern composed of any three from above, linked by two x waves. 

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