Use the Elliott Wave theory to better understand market movements in order to set more efficent entries, stoplosses, take profits and exits.
Elliott Wave theory demonstates predictive and reoccuring patterns across all time frames. Trends are dictated by predominant investor psychology. Swings in the mass psychology always show up in fractal patterns or waves.
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Basic Elliott Wave Theory Explained
Impulsive/Motive and Corrective Waves
Impulsive or Motive waves are large price moves and have associated trends. These waves provides a more consistent trading outcome. You can recognize a change in a trend if you see that a small corrective wave is followed by a large corrective wave in the same direction and the large corrective wave matches or exceeds the previous corrective wave in the opposite direction.
Corrective Waves
These waves occur within a trend. When entering a trade on a corrective wave, the purpose would be to capture the next impulsive wave. For example: Buying pull backs on corrective waves during a bullish trend to ride the impulsive wave up.
Trend and Pullback Price Structures
The Elliott 5-Wave Pattern demonstrates a numbered pattern of 1 – 5 in this way: (1)Impulse -> (2)Correction -> (3)Impulse -> (4)Correction -> (5)Impulse
An uptrend is then followed by a 3-Wave down pattern and it is labeled: (a)Impulse -> (b)Correction -> (c)Impulse
Fractal Properties
Impulse waves on the daily chart would embody 5 waves on the hourly chart and so on.
Corrective waves on the daily chart would embody 3 waves on the hourly chart and so on.
Principal Rules
Wave 3 can never be the shortest impulse wave.
The high of wave 3 must exceed the high of wave 1.
Wave 2 cannot retrace below the low of wave 1.
The low of wave 4 cannot cross below the high wave 1.
If any of these three rules are broken, the pattern must be recounted.
Guidelines:
Wave 5 will be approximately equal to wave 1.
Wave 2 is approximately 60% of wave 1.
Wave 3 is the longest wave.
Wave 4 is approximately 30% - 40% of wave 3.
ABC corrections usually end near the previous low of wave 4.