Thursday, August 11, 2011

Summary: Elliott Wave Theory


  • Elliott Waves are fractals. Each wave can be split into parts, each of which is a very similar copy of the whole. Mathematicians like to call this property "self-similarity".
  • A trending market moves in a 5-3 wave pattern.
  • The first 5-wave pattern is called impulse wave.
  • One of the three impulse waves (1, 3, or 5) will always be extended. Wave 3 is usually the extended one.
  • The second 3-wave pattern is called corrective wave. Letters are used instead of numbers to track the correction.
  • Waves 1, 3 and 5, are made up of a smaller 5-wave impulse pattern while Waves 2 and 4 are made up of smaller 3-wave corrective pattern.
  • There are 21 types of corrective patterns but they are just made up of three very simple, easy-to-understand formations.
  • The three fundamental corrective wave patterns are zig-zags, flats, and triangles.

  • There are three cardinal rules in labeling waves:

    • Rule Number 1: Wave 3 can NEVER be the shortest impulse wave
    • Rule Number 2: Wave 2 can NEVER go beyond the start of Wave 1
    • Rule Number 3: Wave 4 can NEVER cross in the same price area as Wave

  • If you look hard enough at a chart, you'll see that the market really does move in waves.

  • Because the market never moves in text book perfect fashion, it will take many, many hours of practice analyzing waves before you start to get comfortable with Elliott waves. Stay diligent and never give up!

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