Elliott Wave Theory: Market's Natural Rhythm 🌊

Pro Insight

Markets move in predictable waves because human psychology never changes! Understanding these patterns gives you a massive edge. 🎯

Basic Wave Structure

The foundation of Elliott Wave Theory - 5 waves in trend direction, 3 waves in correction.

Impulse Waves

Wave Characteristics

🌊 Wave 1: Initial move up from bottom

• Often overlooked by most traders
• Typically shows moderate volume
• Faces heavy resistance

🌊 Wave 3: The powerhouse wave

• Usually longest and strongest
• Highest volume and momentum
• Clear breakouts and strong trends

🌊 Wave 5: The final push

• Often shows divergence
• Lower volume than Wave 3
• Accompanied by high optimism

Fibonacci Relationships 📐

Key wave relationships that appear consistently:

Wave Relationship	Fibonacci Ratio	Example
Wave 3 to Wave 1	1.618	If Wave 1 = 100 points, Wave 3 ≈ 162 points
Wave 5 to Wave 1	0.618	If Wave 1 = 100 points, Wave 5 ≈ 62 points
Wave 2 Retracement	0.618	Retraces 61.8% of Wave 1
Wave 4 Retracement	0.382	Retraces 38.2% of Wave 3

💡 Pro Tip: These ratios aren't exact - look for relationships within ±5% of these ideal measurements.

Wave Rules

1. Wave 2 never retraces beyond start of Wave 1
2. Wave 3 never shortest
3. Wave 4 never enters Wave 1 territory

Corrective Waves

ABC Patterns 📉

Three main types of corrective patterns:

1. Zigzag Pattern 🎯

   • Sharp, clear price movement
   • A wave: Strong move against trend
   • B wave: Shallow retracement (≤ 61.8%)
   • C wave: Similar length to A wave
   • Most common in volatile markets

2. Flat Pattern ↔️

   • Sideways, range-bound movement
   • A wave: Three-wave decline
   • B wave: Returns near A wave start (90-100%)
   • C wave: Approximately equals A wave
   • Common in consolidating markets

3. Triangle Pattern 📐

   • Five-wave convergent pattern
   • Decreasing wave size
   • Forms clear upper/lower boundaries
   • Usually appears before final move
   • Common in low-volatility periods

Trading Strategy

• Zigzags: Trade the strong C wave
• Flats: Wait for range breakout
• Triangles: Trade the breakout direction

Wave Patterns

Pattern	Description	Success Rate
Zigzag	Sharp correction	75-80%
Flat	Sideways correction	70-75%
Triangle	Converging pattern	65-70%
Complex	Combined patterns	60-65%

Trading Strategy

1. Wave Identification

• Count waves correctly
• Apply wave rules
• Note wave relationships
• Confirm with patterns

2. Entry Points

• Wave 3 entries
• Wave 5 completions
• ABC corrections
• Pattern breakouts

3. Risk Management

• Stop placement
• Position sizing
• Profit targets
• Scale-out levels

Common Mistakes

❌ Forcing wave counts ❌ Ignoring rules ❌ Poor risk control ❌ Early entries

Wave Relationships

Fibonacci Relationships 🔢

Common Wave Measurements 📏

Relationship Type	Ratio	Real-World Example
Extension Ratios	1.618, 2.618, 4.236	Wave 3 often extends 1.618× the length of Wave 1
Retracement Ratios	0.236, 0.382, 0.618	Wave 2 typically retraces 61.8% of Wave 1
Projection Ratios	0.618, 1.000, 1.618	Wave 5 projects 0.618× the distance from Wave 0 to 3

Key Price Levels 🎯

1. Extension Zones

   • 161.8% - Primary target
   • 261.8% - Extended target
   • 423.6% - Exceptional moves

2. Retracement Zones

   • 38.2% - Shallow pullback
   • 50.0% - Median retracement
   • 61.8% - Deep retracement

💡 Trading Tip: Look for price action confirmation at these levels - don't trade the numbers blindly!

Multiple Timeframe Analysis

Fibonacci levels become more significant when they align across different timeframes. Watch for clustering of levels!

Advanced Concepts

1. Wave Degree

• Grand Supercycle
• Supercycle
• Cycle
• Primary
• Intermediate
• Minor
• Minute

2. Wave Personality

• Wave 1: Disbelief
• Wave 2: Hope
• Wave 3: Optimism
• Wave 4: Anxiety
• Wave 5: Euphoria

3. Time Analysis

• Wave duration
• Time relationships
• Cycle analysis
• Seasonal patterns

Practice Exercises

1. Wave Counting

   • Start with larger timeframes
   • Mark clear waves
   • Note relationships
   • Track accuracy

2. Pattern Recognition

   • Identify wave patterns
   • Document success rates
   • Review mistakes
   • Refine analysis

Advanced Wave Analysis

1. Complex Corrections

• Double threes
• Triple threes
• Combination patterns
• Extended corrections

2. Extensions

• Wave 1 extension
• Wave 3 extension
• Wave 5 extension
• Multiple extensions

3. Truncations

• Fifth wave failure
• Diagonal triangles
• Leading diagonals
• Ending diagonals

Pro Trading Tip

The best Elliott Wave trades come when multiple wave degrees align with other technical factors! 🎯

Daily Routine

1. Wave Analysis

   • Update wave counts
   • Mark key levels
   • Note pattern completion
   • Plan entries/exits

2. Trade Management

   • Monitor wave development
   • Adjust stops
   • Scale out at targets
   • Document results

Remember

Elliott Wave is a framework, not a crystal ball. Use it with other tools and always manage your risk! 📈