Introduction to the Elliott Wave 5-3 Market Pattern

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Chapter 1 Elliott Wave Theory Introduction

Elliott Wave theory is one of the most acknowledged and widely used forms of technical analysis. RN Elliott developed the theory after analyzing nearly 75 years of stock data, and Robert Prechter later popularized it.

According to the Wave theory, the market trades in repetitive cycles, which Elliot primarily attributed to the emotions of investors (or the psychology of the masses at the time) as well as outside influences.

The Elliot Wave theory proves that the upward and downward price swings caused by the collective psychology always reflect the same repetitive patterns. Elliot observed that all financial markets move in a zigzag formation, which he termed Wave cycles. With this theory, Elliot was able to analyze markets in greater depth by identifying the specific characteristics of wave patterns and was able to make detailed market predictions based on these patterns.

This is what makes the Elliott Wave theory so appealing to traders as it provides them with a method to spot precise price points where the market is likely to reverse. In simpler words, Elliott came up with a system that enables traders to catch tops and bottoms.

Basic Principals of the Theory

The Elliott Wave theory states that the market is fractal in nature i.e. it forms the same patterns that are observed on larger degree charts on smaller timeframe as well, and that it can be used to predict future price movement. The theory states that it does not depend on the timeframe one analyzes as a similar price pattern is observed across all time frames.

The theory claims that that market action among the participants produces wave patterns and trends, defined by Elliott as the physical sign of mass psychology.

The complete cycle of the Elliot Wave development consists of eight waves that make up two phases:

1) An impulse wave sub-divided into five waves and,

2) A corrective wave sub-divided into three waves

According to the theory, price movement in the direction of the main trend is defined as the impulse or motive phase, which unfolds in five waves. Three of those waves (1, 3, and 5) move in the direction of the underlying trend, while the two intervening waves (2 and 4) act as counter-trends or minor retracements within the phase.

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Wave 5’s up move is followed by a correction 3, which traders usually label as A, B, and C. The 5-3 wave pattern can be seen across all timeframes.

The corrective phase consists of two waves (A and C) that move in the opposite direction of the motive phase, and an intervening retracement wave (B) that moves in the same direction of the motive phase.

The 5-3 wave pattern establishes a complete Elliot wave cycle. The theory tends to get more complicated as more degrees of waves get added. The key to using the Elliot wave successfully lies in counting the waves correctly and identifying the wave in which the market is currently trading in.

Wave Degrees

Elliott identified nine degrees of waves that could range from a multi-century timeframe to short-term intraday movements. A labeling convention is used to identify the degree of each wave. The largest degree wave is labeled as Grand Supercycle, followed by Supercycle, while the smallest degree wave is labeled as ‘sub-minuette’.

Here is the hierarchy of the nine degrees of waves:

  • A Grand Supercycle is made up of Supercycle waves
  • Supercycle waves are made up of Cycle waves
  • Cycle waves are made up of Primary waves
  • Primary waves are made up of Intermediate waves
  • Intermediate waves are made up of Minor waves
  • Minor waves are made up of Minute waves
  • Minute waves are made up of Minuette waves, and
  • Minuette waves are made up of Subminuette waves

Here is the timeframe for each of these nine degrees of waves:

  • Grand Supercycle (multi-century)
  • Supercycle (about 40–70 years)
  • Cycle (one year to several years)
  • Primary (a few months to a couple of years)
  • Intermediate (weeks to months)
  • Minor (weeks)
  • Minute (days)
  • Minuette (hours)
  • Sub-Minuette (minutes)

Most chartists use only 1-4 wave degrees, as applying all nine degrees of waves while trading tends to get quite complicated. The labeling convention is shown in the table below.

An example of how Roman characters are used to represent the different waves.

Basic 5-Wave Sequence

As we saw earlier, there are two types of waves: impulse and corrective. An impulse wave’s movement is seen in the direction of the larger degree wave. In a rising market, where the direction of the larger degree wave is upwards, the advancing waves are impulsive, while the declining waves are corrective.

Waves 1, 3, 5 are impulse, meaning they go along with the overall trend, while Waves 2 and 4 are corrective.

*Do not confuse Waves 2 and 4 with the ABC corrective pattern though*

Likewise, in a bear market, where the larger degree wave is down, the impulsive waves are also down and vice versa for corrective waves.

We can see a rising 5-wave sequence in the chart above. Waves 1-3-5 (marked in green) tend to move in the direction of the main trend, while 2-4 (marked in red) are minor corrections within the main trend. The entire 5-wave sequence forms the impulse advance phase.

Basic 3-Wave Sequence

The 5-wave trends are then corrected and reversed by 3-wave countertrends and letters are used instead of numbers to track the correction.

The above chart shows a simple corrective wave labeled a, b, and c. Notice that a-c waves (marked in green) act as a correction to the main impulse phase, while wave b (marked in red) tends to act as a minor up move within the correction phase.

Complete 5-3 Elliot Wave Sequence

The above chart depicts a complete Elliot Wave sequence with the initial 5-wave impulse phase followed by the 3-wave corrective phase. The ‘a-b-c’ corrective phase represents a correction in the larger impulse phase.

In the above chart, we witness the inverse. The impulse phase, which is the main trend, is downwards, while the correction phase, comprising of waves a-b-c, trends upwards.

Rules of Elliot Wave Theory

There are three main rules to the Elliot Wave theory that analysts must know. These rules apply only to the impulse phase.

  • First rule: Wave 2 cannot retrace more than 100% of Wave 1
  • Second rule: Wave 3 cannot be the shortest among waves 1, 3, and 5
  • Third rule: Waves 1 and Wave 4 must not overlap

The above image clearly explains the three rules in a simple manner.

  • Wave 2 cannot move below the low of Wave 1. A break below this low would invalidate the theory.
  • Wave 3 is usually the longest of the three impulse waves; the theory states that it cannot be shorter than wave 1 and 5. Wave 3 should also exceed the height of wave 1.
  • Wave 4 cannot overlap Wave 1, which means the low of Wave 4 cannot exceed the high of Wave 1.

Guidelines

There are numerous guidelines to this theory, but we will take a look at the most prominent ones. Unlike the three cardinal rules, these guidelines can be broken.

Guideline 1: When Wave 3 is the longest impulse wave, Wave 5 will approximately equal Wave 1.

Guideline 2: The forms for Wave 2 and Wave 4 will alternate. If Wave 2 is a sharp correction, then Wave 4 will be a flat correction. If Wave 2 is flat, then Wave 4 will be sharp.

Guideline 3: Sometimes, Wave 5 does not move beyond the end of Wave 3. This is known as truncation.

Guideline 4: After a 5-wave impulse advance, corrections (a-b-c) usually end in the area of prior Wave 4 low.

Guideline 5: Wave 3 tends to be very long, sharp, and extended.

Guideline 6: Waves 2 and 4 frequently bounce off Fibonacci retracement levels.

In the above example of Time Technoplast, we observe the complete Elliot Wave plotted in the graph. As we can see, the waves are not shaped perfectly in real life, however, all the technical rules can be perfectly observed. An analyst who is successfully able to identify the wave in which the stock is currently trading would be in a position to preempt future movement in the stock and profit from it.

Elliott Wave Theory (How To Trade Elliott Waves In 6 Simple Steps)

The Elliott wave theory, ( or some call it the Elliott Wave Principle) Elliott wave analysis and how to trade Elliott Waves can be a mind boggling trading concept to understand especially for a new forex trader.

You see, I consider myself pretty good when it comes to price action forex technical analysis but when it comes to Elliott waves, even the “old dog” gets lost sometimes…

Elliott Wave Theory and How to trade it, is without doubt one of the most difficult trading concepts to understand because you are now just focusing on one or two things but quite a handful of them.

  • corrective waves,
  • motive waves,
  • impulse waves,
  • grand super cycles,
  • supercycles,
  • 5 wave pattern,
  • 3 wave pattern and so forth.
  • And then there’s the Elliott wave fractals…what’s that supposed to mean?

Can you see what I’m getting at?

And guess what? That is not the complete list!

Here’s what I mean by getting lost:

There are two things that make many forex traders stay away from trying to understand how to trade Elliott Waves:

  1. The Elliott Wave Theory itself is difficult to grasp at first.
  2. The application of the Elliott Wave theory in real time trading gets difficult because the charts look messy. Where do you being the wave count? Is this the 1st wave, the 2nd, the third. Is this the 5th wave?

the basic Elliott wave theory itself can be understood if you spend a bit more time on it but the application part in real time trading is what gets most traders lost…and I mean SERIOUSLY lost in some cases.

Elliott wave trading is not that easy to understand…at first. As a matter of fact, the easiest part is the theory part.

The hardest part is the application part!

Frankly speaking, there’s too much work involved in Elliott wave analysis and who really has time for that?

So, that’s why I have put his Elliott Wave Trading Course together to write it in a simple way to make newbie forex traders understand Elliott waves and Elliot wave theory better better.

And if that is the part you want to take, I hope that what you learn here will take you a long way…

Let’s get started!

Who Developed The Elliott Wave Theory?

There was a guy in the 1920’s/30’s who was called Ralph Nelson Elliott. That’s a photo of him down there. He was the guy who came up with this Elliott Wave Theory.

He analysed 75 years worth of stock data and stumbled upon a discovery about the behavior of the stock market.

This is the discovery: stock prices do not move chaotic manner but in repetitive cycles.

He published his theory in a book called The Wave Principle when he was about 66 years old.

According to Mr Elliott, these repetitive cycles of stock prices were the results of:

  • investor emotions caused by outside influences or
  • trading mass psychology at that time

Elliott explained that the downward and upward swings in stock market prices caused by the collective mass trading psychology always show up in the same repetitive patterns.

And he called these swings, waves.

And so Elliott explained that if you know the structure of these waves , then you can correctly predict where price will go next (or not go) .

This is what really matters to traders=making the right prediction about where the price will go next or not go next.

Amidst Chaos There’s Order&Structure

The really cool thing about the with Elliott’s discovery was the fact that now traders would no longer look at market upswings and downswing as random or chaotic price movements but now they can find order and structure in those price movements.

Elliot named this discovery after himself, calling it the The Elliott Wave Theory.

So put simply, the Elliott wave theory helped traders find order and structure in a chaotic market!

Elliot Wave Analysis

This is the theory of Elliott Wave: Mr Elliot said that in a trending market, price moves in a 5-3 wave pattern.

And in this 5-3 wave pattern, there are two types of waves:

  1. the first wave pattern is called the impulse wave
  2. the second wave pattern is called the corrective wave.

So what are impulse waves? Impulse waves are waves that move in the direction of the main trend.

What are corrective waves? Corrective waves are waves the move in against the main trend.

Now, let me go through each of these waves…

The Basic 5 Elliott Wave Pattern

The chart below shows the structure of the 5 wave pattern or sequence. As you can see the trend is up.

  • waves 1, 3 and 5 are impulse waves
  • waves 3 and 4 are corrective waves.

Remember this: impulse(or motive) waves go with the main trend and corrective waves go against the trend.

This is the most basic impulse advance 5-wave Elliott wave sequence.

Elliott Wave-Basic 3 Wave Correction

Now, what happens above after the 5 wave sequence above?

Well, price goes into what is called a corrective wave sequence…that sounds really fancy so let me make it easier for you to digest: after the 5 wave sequence, expect price to start developing a pattern to change the trend direction.

For example, if the trend was up then after the 5 wave sequence has developed fully then expect the market to start turning and head down, forming a downtrend!

So in addition to the 5 wave sequence, you now have 3 more waves, which is called the corrective wave pattern.

Now, these 3 additional waves are not numbered 6, 7 and 8. They are marked in letters, a, b & c waves as shown on the chart below:

Notice on the chart above the waves a & c are impulse waves and b is corrective wave.

Complete 8 Wave Cycle

Now, if you bring the basic 5 wave pattern and the 3 wave pattern together, you get a complete Elliott wave cycle that consists of 8 waves and looks like this in an uptrend market:

Ralph Elliott divided this complete wave cycle into two distinct parts, the impulse and corrective wave parts.

The impulse phase is represented by the 5 wave sequence and abc waves represented the correction of the main trend or the larger impulse phase.

Similarly, in a downtrend market, you will have something like this:

The 3 Golden Rules Of Elliott Wave Theory

Just like the Old Testament has 10 commandments and the 9th commandment, (“paraphrase”) goes like this: thou shall not covert your neighbor’s wife.

Well? Mr Elliott had 3 specific” commandments” about the Elliott Theory too but this had nothing to do with women:

  1. Wave 2 shall not retrace more than 100 % of wave 1
  2. Wave 3 shall never be the shortest of the 3 impulse waves
  3. Wave 4 can never overlap wave 1.

This chart below should make understanding of these 3 Elliott wave trading rules much clearer:

Further Explanation on these 3 rules:

  • Rule 1 explained: wave 2 cannot go below the low of wave 1. If a break occurs below this low, you need to start your re-count.
  • Rule 2 explained: wave 3 should be the longest of the 3 impulse waves but it cannot be the shortest which means that either 1 or 5 can be longer but BOTH CANNOT BE longer than wave 3. Also the high of wave 3 must be higher than that of wave 1 and it it is not high, you have to start your re-count. Impulse waves are meant to be making progress not slowing down. Therefore if price does not exceed the high of wave 2, then that means there’s no progress therefore you have to start the re-count.
  • Rule 3 explained: wave 4 cannot overlap wave 1 which simply means that the LOW OF WAVE 4 cannot go BELOW THE HIGH OF WAVE 1. If that happens, you need a re-count.

Elliott Waves And Fractals

What are fractals? Fractals are structures that can be split into parts and the split parts will be a very similar copy of the whole part that they split from.

Nature has a lots of fractals, here are few examples:

Ok, so what does fractals have to do with Elliott waves then?

You see, Elliott waves are fractals.

Because Elliott waves can be be again subdivided into smaller Elliot waves.

Here’s what that means:

Here are example of Elliott Wave Fractals In a downtrend:

So basically, Elliott wave fractals are the smaller Elliott wave patterns within the bigger Elliott wave patterns .

Put simply, Elliott Wave fractals are “Elliott waves within Elliott waves”:

These Elliott wave fractals do create a one big problem for many forex traders on real live trading charts.

Here’s the problem: how can a trader tell the start of the bigger Elliott wave fractal…or is it the smaller wave fractal.

You see what I’m talking about here?

3 Elliott Wave Guidelines

So you think that all you need is the 3 Elliott Wave Theory Golden rules and you’d be done with, right?

You see, you got 3 golden rules and then you also have 3 Elliott Wave guidelines…

So what are these 3 Elliott wave theory guidelines?

  1. when the wave 3 is the longer impulse wave, wave 5 will be almost/approximately equal to wave 1
  2. the forms for wave 2 and wave 4 will alternate…if wave 2 is a sharp correction, wave 4 will be a flat correction. If wave 2 is flat, wave 4 will be sharp.
  3. after a 5 wave impulse advance, corrections abc usually end in the area of prior wave 4 low.

Why 3 Elliott Wave Guidelines Are Important?

If you are wondering why the 3 Elliott wave guidelines are important then here are the reasons why:

First Guideline

  • useful for targeting the end of Wave 5.
  • Even though Wave 5 could be longer than Wave 3 and Wave 3 could still be longer than Wave 1, chartists can make initial Wave 5 projections once Wave 4 ends.
  • In a larger uptrend, chartists simply apply the length of Wave 1 (percentage change) to the low of Wave 4 for an upside target.
  • The opposite is true for a 5-wave decline.
  • The percentage decline in Wave 1 would be applied to the high of Wave 4 for a Wave 5 estimate.

Second Guideline

  • is useful for determining the time of correction for Wave 4.
  • After a sharp decline for Wave 2, chartists can expect a relatively flat correction for Wave 4.
  • If Wave 2 is relatively flat, then chartists can expect a relatively sharp Wave 4.
  • In practice, Wave 2 tends to be a rather sharp wave that retraces a large portion of Wave 1.
  • Wave 4 comes after an extended Wave 3.
  • This Wave 4 marks more of a consolidation that lays the groundwork for a Wave 5 trend resumption.

Third Guideline

  • useful for estimating the end of a Wave II correction after a Wave I advance.
  • Waves I and II are the larger degree waves. Waves 1-2-3-4-5 are lesser degree waves within Wave I.
  • Once the Wave II correction unfolds, chartists can estimate its end by looking at the end of the prior wave 4 (lesser degree wave 4).
  • In a larger degree uptrend, Wave II would be expected to bottom near the low of lesser degree Wave 4.
  • In a larger degree downtrend, Wave II would be expected to peak near the high of lesser degree Wave 4.

How To Trade Forex Using Elliott Waves

You’ve learn the theory part…good.

Now lets get to what you are really here for: how to actually apply the Elliott wave theory to real live trading.

All of the Elliott wave charts you you have seen above are all “perfect”.

Well, I got bad news for you…the real live trading forex charts are not like that at all. They are messy and there are so much “noise” in them.

You really have to spend a lot more time on this to master Elliott Wave Trading.

In this section, I will show you some examples of real charts based on live market conditions and show you techniques on how to trade Elliot Wave patterns.

The Best Elliott Waves To Enter A Trade

The two best Elliott waves to enter trades on are the corrective waves 2 and 4 as shown on the chart below.

To make it simple, forget about all the waves that happen after wave 5.

It tends to really get confusing past that.

If you get into a trade and based on your count you see that you are riding the 5th wave, it would be the ideal time to:

  • start taking some profits off the table
  • and start trailing stop your trade to lock in your remaining profits because the trend may just be about ending soon.

2 Things Necessary For Trading Elliott Waves

The two things necessary for trading Elliott Waves are:

Now we are getting somewhere, aren’t we?

Steps To Trading Elliott Waves

Step 1: Identify Trend Start/End

Step 1 is to Identify if the trend has ended/new trend has started

To do this, you need to know and understand the structure of a trend and based on this you can identify if a trend has ended/a new trend is starting:

Based on the chart above:

  • If market is in an uptrend, price will intersect the Higher Higher and continue going up.
  • In a downtrend, price will make a Lower High instead of a Higher High and then intersect the Higher Low and continue to head down.

It looks and sounds complicated but really it is very simple…it is all about support levels being broken and resistance levels being broken causing downtrends and uptrends respectively.

What are the Ideal Locations Where Trend Changes Occur?

One of the best places where trend changes occur are on support and resistance levels. If you can identify them and wait for price to hit them and then start your first count 1 as price starts moving up or down.

The chart below shows what I’m talking about:

Others can include:

  • diagonal price channels
  • trendline bounces and trendline breaks
  • support turned resistance, resistance turned support levels
  • Fibonacci extensions and retracements levels

Just think outside the box for a little on how you can use these with the Elliot Wave Counts

Step 2: Start Count 1

Step 2 is to Start Your Wave Count 1.

Your first wave count is the important one because that’s where everything starts off from.

The first wave as mentioned can happen because of the things mentioned in step 1:

  • resistance and support levels
  • trendlines
  • price channels etc

Can you trade wave 1?

But you can trade wave 1 move using methods like trendline trading strategy which allows you to ride that first wave 1.

So when the correction wave 2 starts to form, that’s when you’d be looking to add another position onto this trend. That’s applying the pyramid trading technique .

Step 3: Start Count Wave To & Prepare To Trade

Step 3 is to Start your wave 2 Count and prepare to take your first trade based on Elliott Wave Theory!

Now you see that wave 1 is finished and looks like wave 2 is forming.

Sit up straight now because this is where you will be entering your first trade based on the Elliott Wave!

Watch your fibonacci retracement levels like 50% and 61.8% levels. That’s where you buy or sell.

In addition to that, you need to know your reversal candlestick patterns that will confirm your trade setup on these fib levels.

Here are the Bullish Reversal Candlestick Patterns you should be looking out for when wave 2 is forming and hits those Fibonacci retracement levels:

Similarly, there are the Bearish Reversal Candlestick Patterns you should also be watching out for in a downtrend when wave 2 is forming:

These bullish and bearish reversal candlesticks above do really help so you need to remember them.

Step 4: Start Wave Count 3 And Watch Your Profits Increase!

Step 4 is when wave 3 starts.

You do nothing here except ride out wave 3 and Watch Your Trading Profits Increase!

By now, you know that wave 3 is supposed to be the longest of the 5 waves.

If your prediction is right, wave 3 where you make the most money (profits):

Step 5: Start wave count 4 and Prepare to Trade

Step 5 is to start your wave count 4 so that you can take a trade just as wave 4 is ending so that you can ride out wave 5.

Assuming all is going out as predicted, this is where you will enter your 2nd trade based on the Elliott wave theory.

Similar to step 3, use:

  • fibonacci retracement levels, 38.2, 50% 0r 61.8 to identify potential turning points
  • and also use reversal candlestick for trade entry confirmation
  • you can also use or combine trendline trading strategy to enter here as well if price comes and hits the trendline as shown on this soybean futures chart below:

Step 6: Wave 5 Count: Start Taking Profits Off the Table

You know that based on the Elliott Wave Theory, the market starts to loose its steam once wave 5 goes past the high of wave 3.

The trend has a good chance of changing.

So what do you think you should be doing?

  1. I’d be taking profits off the table, maybe closing most of my trading positions and and leave a few running
  2. those few trader running, I’d be using this trailing stop loss technique to lock in my profits until the market takes me out.

What about trading the abc waves?

I’f you’ve made most of you money from wave 3 and then a little bit from wave 5, forget about trading the abc waves.

Wait for a new trend to form and repeat the process.

5-3 (8) Pattern Elliott Waves Happen In Every Trend?

Sometimes, your wave count may terminate on wave 3, or 4.

Remember the 3 Elliott Wave Theory Rules?:

  1. Wave 2 shall not retrace more than 100 % of wave 1
  2. Wave 3 shall never be the shortest of the 3 impulse waves
  3. Wave 4 can never overlap wave 1.

If you start counting and if these waves mentioned above fail to satisfy the rules, that waves becomes null and void which means you have to start your counting again.

Summary

  • Elliot Wave Theory is a complex theory.
  • What I’ve covered here is not all that is to know about it…this is just the very basic. There’s a lot more to Elliott Wave Trading Than this.
  • Elliott Wave Theory is simply support and resistance trading explained differently.
  • All the complexities of Elliott Wave Theory when you strip it all away comes down to support and resistance trading…that’s it! No more no less.
  • You don’t really need to over complicate it when you think in terms of support and resistance levels being broken and price rising or falling below them.
  • The use of fibonacci retracements levels as well as extension do help in Elliott Wave trading as well as the use of bullish and bearish reversal candlestick patterns.

I hope I’ve made Elliott Wave Theory and Trading much simpler and easier for you to understand than many other trading websites.

If you think so, why not share your appreciation by clicking those sharing buttons below and share it? I’d really be thankful if you did that.

Intoduction to Elliott Wave analysis

What is Elliott Wave analysis all about?

You probably heard something about Elliott waves or even seen wave counts. That’s because nowadays Elliott wave analysis becomes one of the most popular approaches of the Forex market forecasting. Why? Elliott Wave Principle is the only tool in our experience, which can sort out the price movement on every timeframe from the Monthly or even Yearly chars to just one-minute intraday intervals. For example, you can trade on intraday charts, but at the same time, you also have a bigger picture. Simply put, Elliott waves are the DNA of the market. In the following articles, we will guide you through the Elliott Wave Principle. Let’s go.

Who is the author?

We should say many thanks to Ralph Nelson Elliott (1871 – 1948), who was an accountant and economist. In 1938 he published ‘The Wave Principle’, and his second book ‘Nature’s Law – The Secret of the Universe’ was printed in 1946. Elliott described patterns that repeatedly form on the market according to very well-defined rules.

We must also thank Robert R. Prechter Jr. and A.J. Frost for the book ‘Elliott Wave Principle: Key to Market Behavior’, which nowadays is the primary source of rules and guidelines. And furthermore, in 2006 another great book was published – ‘Elliott’s Code’ by D.V. Vozny. Unfortunately for many readers around the world, this book is in Russian.

The begging of the journey

So, this series of articles based on the two books. Any rule or guideline in any article fits the rules in these publications. And rest assured, I’m not going to just retell you the books. The thing, I’m really going to do, is to teach you the Elliott Wave Principle and share my experience. The most examples will be from the real market. Also, we’ll go through some cases, which aren’t described in the books, but you can find them on the charts.

Market’s LEGO

There’re two main things in the Elliott Wave Principle: impulses (five-waves price movements) and corrections (three-waves price movements). We’ll come back to this in the next articles, so you’ll see that there’s just one main LEGO block, which is an impulse. But for now, let’s focus on these two ones.

Let’s have a look at the chart below. You can see there a 5-wave decline – that’s an impulse wave (there’re some cases where we could have a 5-wave correction, but I’m going to describe it later). Also, there’s a 3-wave advance, which we could consider a correction. Fine, we’ve just found an impulse and a correction, so it’s time to see a little bit bigger picture.

The next chart is just the real wave count, which I posted in my analytics. The decline is likely in the third wave of a bearish impulse, while an upward bounce is the fourth wave of it.

So, we can come to the following conclusion: there’s no wave, which could stay apart from the others. The Elliot Wave Principle is like a Russian nesting doll (Matryoshka). Each wave is a part of another wave, but also each wave consists of smaller waves. This story happens from higher to lower timeframes.

And this makes the Elliott Wave Principle different from other techniques of market analysis. The majority of the technical analysis approaches focus on patterns and signals, which stand aside from each other. The power of EWP is an ability to see the bigger picture, not just an individual setup.

Thinking opportunities

You probably heard that if you use the EWP in trading, you will come across more than one possible wave counts. Usually you have a few possible scenarios, which sometimes are contradictory. This is the most exciting about the EWP because it’s like playing chess.

If some holy-grail indicator tells you to buy or sell, you wouldn’t think what you’re going to do if something goes wrong. With the EWP, you are trying to figure out trading actions depending on which wave count is in place. That’s a core skill of a successful trader.

Real examples

Let’s get to some real stories. The first example is the DJI index. In September 2020, the index reached the historical high, and I posted a quite bullish wave count. I expected the market much higher because the fifth wave was far from over.

A few months later, the market climbed even higher, but I was still bullish. This expectation was based on some things in the EWP we’re going to learn soon, but for now, you can see how it worked.

So, the trend is still bullish, and you can see the current wave count below.

The second story is USD/TRY. In October 2020, the fourth wave looked finished as a triangle, so I expected another bullish impulse, which developed in the next few months.

Then there was a long story with a bearish correction, which finally ended up, so the bullish trend has been continued as expected.

Finally, in April 2020 there was another bullish moment because of the possible ending of wave 4. So, the market went even higher.

Bottom line

There’re bad examples as well. However, speaking of trading, the most important thing is what you’re doing when the market is moving along the trend according to your wave count. So, we can use the EWP as a great tool to find opportunities in the markets.

In addition, there’s no obligation for you to trade any wave count you labeled or just seen on the web. You should trade only the best counts when you have a great moment to open a trade. In other words, you should wait for a good call like a hunter in the woods. And when you see the opportunity, then you do the best to trade it most successfully.

It’s just the beginning. In the next articles, we’re going through the more specific rules and guidelines of the EWP.

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