Thursday, October 24, 2013

All about Elliott Wave Rules and Guidelines

Elliott Rules must be obeyed in every detail for a pattern to qualify as an Elliott Pattern (or wave). However, the Guidelines do not have to be obeyed. The more Guidelines obeyed by an Elliott pattern, the higher its rating or probability of being correct.

Impulse Rules:

An Impulse is a five Wave pattern labeled 1-2-3-4-5 moving in the direction of the larger trend. It is the most common Elliott Wave pattern.

  • Wave 1 must be an Impulse or a Leading Diagonal.
  • Wave 2 may be any corrective pattern except a Triangle.
  • No part of Wave 2 can more than retrace Wave 1.
  • Wave 2 must retrace Wave 1 by a minimum of 20%.
  • The maximum time for Wave 2 is nine times Wave 1.
  • Wave 3 must be an Impulse.
  • Wave 3 must be longer than Wave 2 in gross distance by price.
  • The gross price movement of Wave 2 must be greater than either Wave 2 of Wave 1 or Wave 4 of Wave 1. The gross price movement of Wave 2 must also be greater than either Wave 2 of Wave 3 or Wave 4 of Wave 3. Wave 2 must also be greater than 61.8% of the gross movement of each of the above 4 sub-Waves.
  • Wave 3 and Wave 1 cannot both have 5th Wave failures. (A Failure is an impulsive Wave where Wave 5 is shorter than Wave 4 by price.)
  • Wave 3 cannot be less than 1/3 of Wave 1 by price.
  • Wave 3 cannot be more than 7 times Wave 1 by price.
  • Although there is no minimum time constraint for Wave 3, its absolute maximum time limit is 7 times Wave 1.
  • Wave 4 can be any corrective pattern.
  • Waves 1, 2 and 4 cannot overlap except by 15% of Wave 2 with leveraged securities, and then only for a maximum of less than two days.
  • The gross price movement of Wave 4 must be greater than either the gross movement of Wave 2 of 3 or Wave 4 of 3. The gross price movement of Wave 4 must also be greater than either the gross movement of Wave 2 of 5 or Wave 4 of 5. The gross movement by price of Wave 4 must also be greater than 61.8% of the gross movement of each of these four subwaves.
  • The gross movement by price of Wave 4 must be greater than 1/3 of the gross movement of Wave 2 by both price and percentage movement.
  • The gross movement by price for Wave 4 must be less than three times the gross movement of Wave 2 by both price and percentage movement.
  • Wave 3 and Wave 4 cannot both be failures. (A Failure is an impulsive Wave where Wave 5 is shorter than Wave 4 by price.)
  • Although Wave 4 has no minimum time constraint, the maximum time for Wave 4 is twice the time taken by Wave 3.
  • Wave 5 must be an Impulse or an Ending Diagonal. However, if Wave 5 is longer than Wave 3 by price, then Wave 5 must be an Impulse.
  • Wave 5 must move by price more than 70% of Wave 4. (This is not gross movement. Only consider the end points of both Waves.)
  • Wave 3 must never be shorter than both Wave 1 and 5, by either price distance or percentage price movement.
  • If Wave 5 is truncated, or contains an Impulse that is truncated, then neither Wave 3 nor Wave 4 can contain a subwave that is truncated. (A truncated pattern is where Wave 5 is shorter than Wave 4. This is also known as a failure.)
  • The maximum movement of Wave 5 is six times Wave 3 in both price and time.
  • Wave 5 has no minimum time constraint.

Impulse Guidelines:

  • Wave 1 can be a Leading Diagonal, but this is rare.
  • Wave 2 is usually a Zigzag based pattern.
  • Wave 2 usually takes a small amount of time compared to Wave 1. However, Wave 2 is usually takes more than 10% of the time taken by Wave 1.
  • Wave 2 generally retraces more than 30% of Wave 1 including internal data points.
  • Wave 2 will usually retraces less than 80% of Wave 1 .
  • The most likely retracement for Wave 2 is 50% or 61.8% of Wave 1.
  • The gross price movement of Wave 2 should be greater than the gross price movement of Waves 2 of 1, 4 of 1, 2 of 3 and 4 of 3.
  • If the gross movement of Wave 2 is between 33% and 40.3% retracement of Wave 1, it is most likely complete.
  • If the gross movement of Wave 2 has retraced to end of previous Wave 4 of 1, then it is most likely complete.
  • It is unlikely that Wave 3 will be shorter than Wave 1 by price.
  • The most likely price range for Wave 3 is between 1.5 and 3.5 times the price range of Wave 1.
  • Most likely range in time for Wave 3 is between 1 and 4 times the time taken by Wave 1.
  • Wave 4 is rarely a Zigzag based correction.
  • It is common for both Waves 4 & 2 to have approximately the same price movement.
  • Wave 4 will most often retrace more than 20% of Wave 3, including internal points.
  • Wave 4 will very often retrace about 38.2% of Wave 3.
  • Wave 4 does not often retrace Wave 3 by more than 50%.
  • Wave 4 will often retrace into the price territory of previous Wave 4 of Wave 1.
  • Wave 4 will most often retrace to the end of the previous Wave 4 of one lesser degree.
  • Waves 2 & 4 usually alternate between Zigzag and Flat. The other alternation is between a Triangle and a Flat.
  • Leveraged markets may at times overlap by up to 15% of Wave 2 by price.
  • The gross price movement of Wave 4 should be greater than the gross price movement of Waves 2 of 3, 4 of 3, 2 of 5 and 4 of 5.
  • Expect the time taken by Wave 4 to be between 100% - 270% of the time taken by Wave 2.
  • Wave 5 will usually move beyond the end of Wave 3.
  • When Wave 5 is extended (more than 161.8% longer than both Waves 1 and 3) a point within Wave 4 will often divide the entire Impulse Wave by 1.618.
  • If Wave 5 is extended (more than 161.8% longer than both Waves 1 and 3), it is common for its price length to be about 161.8% of the gross price length between the beginning of Wave 1 to end of Wave 3.
  • It is unusual for Wave 5 to travel a greater price or time percentage than Wave 3 traveled in its entirety.
  • The most likely price targets for Wave 5 are: 61.8% of Wave 1, 100% of Wave 1, 161.8% of Wave 1, 161.8% of the length from the beginning of Wave 1 to end of Wave 3.
  • If Wave 3 is about equal to 161.8% of Wave 1 by price, the most likely time for Wave 5 is about equal to the time taken by Wave 1.
  • One of the Impulse Waves (Waves 1, 3 or 5) generally extends (at least 162% times the next longest Impulse Wave).
  • The most likely Wave to extend is the 3rd Wave of an Impulse. However, in leveraged funds when the Impulse is rising and the degree is Primary or above, the most likely Wave to extend is Wave 5.
  • A non-extended 5th Wave of less than Primary degree usually has a lower peak volume than a third Wave. However, when the 5th Wave extends (less than Primary degree), Wave 5 has usually shows more volume.
  • Wave 5, when complete, usually has a lesser slope than Wave 3. However, in leveraged securities when the Impulse is rising and the degree is Primary or above, this is not usually the case.
  • Wave 5 is usually less than 4 times length of Wave 3 by time.

ZigZag Rules:

A ZigZag is a three wave structure labeled A-B-C, generally moving counter to the larger trend. It is the most common three wave Elliott pattern. Zigzags are corrective in nature.

  • Wave A must be an Impulse or a Leading Diagonal.
  • Wave B can only be a corrective pattern.
  • Wave B must be shorter than Wave A by price. All internal points are considered.
  • Wave B must be at least 20% of A by price.
  • Although there is no minimum time constraint for Wave B, it must not exceed 10 times the time taken by Wave A.
  • Wave C must be an Impulse or an Ending Diagonal.
  • If Wave A is a Leading Diagonal, then Wave C must not be an Ending Diagonal.
  • Wave C must be longer than 90% of Wave B by price.
  • Wave C must be less than 5 times Wave B by price.
  • It is not allowable to have both Wave 5 of A a failure (Wave 5 is shorter then Wave 4) and Wave 5 of C a failure.
  • Wave C must be no more than 10 times either Wave A or B in price or time.

ZigZag Guidelines:

  • It is unusual for a Wave within Wave A to have a greater gross price movement than Wave A.
  • Wave B should end nowhere near beginning of Wave A
  • Wave B should retrace at least 30% of Wave A.
  • Wave B is most likely to retrace Wave A by about 38.2%.
  • Wave B is next most likely to retrace Wave A by about 50%.
  • Wave B is next most likely to retrace Wave A by about 61.8%.
  • The largest Wave in B is usually less than the gross price movement of Wave A.
  • The time taken by Wave B is usually between 61.8% and 161.8% of the time taken by Wave A.
  • Wave C is most likely to have a similar price length to Wave A.
  • The next most likely price lengths for Wave C are 61.8% and 161% of Wave A
  • The next most likely price length for Wave C is 61.8% of Wave A beyond the end of Wave A.
  • If Wave C is much longer than 161.8% of A, then the pattern is more probably the beginning of an Impulse than a Zigzag.
  • If Wave C is complete, and has a greater slope than Wave A, expect the Zigzag to extend to an Impulse.
  • Although Wave C should always be greater in price to Wave B, in rare cases Wave C can be up to 10% shorter than Wave B.
  • The largest Wave within C by price is usually less than the gross price movement of Wave A.
  • The time taken by Wave C is usually between 61.8% of Wave A and 161.8% of the shortest Wave of A and B.

Flat Rules:

A Flat is a three wave pattern labeled A-B-C that moves generally sideways. It is corrective and counter-trend and is a very common Elliott pattern.

  • Wave A can be any corrective pattern except a Triangle.
  • Wave B can be any corrective pattern except a Triangle.
  • Wave B must retrace more than 70% of Wave A.
  • Wave B is less than twice the price movement of Wave A, including internal points of Wave B.
  • Although there is no minimum time constraint for Wave B, it must be less than 10 times Wave A.
  • Wave C must be an Impulse or Ending Diagonal.
  • Wave C must share some common price territory with Wave A.
  • Wave C must be less than twice the longest of Waves A and B, including internal points of Wave C.
  • Wave C must be less the three times the price distance of Wave A.
  • Disallow back to back failures.
  • Wave C must be no more than 10 times either Waves A or B in price and time.
  • There is no minimum time constrains for Wave A.

Flat Guidelines:

  • Wave A is usually a Zigzag family pattern.
  • Wave A is rarely an Expanding Triangle.
  • The largest Wave within Wave A is usually less than Wave A by price.
  • Wave B is usually a Zigzag family pattern.
  • Wave B is rarely a Flat.
  • Wave B is usually greater than 95% of Wave A by price.
  • Wave B is usually less than 140% of Wave A by price.
  • The largest Wave within B is usually less than Wave A by price.
  • The time taken by Wave B is generally between 61.8% and 161.8% of Wave A.
  • Wave C is rarely an Ending Diagonal.
  • Wave C is often about the same length as both Wave A and B.
  • Wave C often ends at point which is a percent of Wave A beyond end of Wave A equal to the same percentage away from the start of Wave A.
  • Wave C usually retraces a minimum of 100% of Wave B.
  • Wave C normally reaches to the end of Wave A
  • Wave C is not often more than 140% of the longer of Wave A or B.
  • If Wave C is longer than Wave B, then Wave C is often about 61.8% of A beyond end of A.
  • If Wave C is longer than Wave B, then Wave C is often about 161.8% of Wave A from end of Wave B by price.
  • The time taken by Wave C is generally between 61.8% of Wave 1 to 161.8% of the shortest of Waves A and B.

Diagonal Rules:

LD = Leading Diagonal, ED = Ending Diagonal

A Diagonal is a common 5 Wave Impulsive pattern labeled 1-2-3-4-5 that moves with the larger trend. Diagonals move within two channel lines drawn from Waves 1 to 3, and from Waves 2 to 4. A Diagonal must be contracting. There exist two types of Diagonals; Leading and Ending. They have a different internal structure and are seen in different positions within the larger degree pattern. Ending Diagonals are much more common than Leading Diagonals.

  • Wave 1 of a LD must be an Impulse or a LD.
  • Wave 1 of an ED must be a Zigzag family pattern.
  • Wave 2 may be any corrective pattern except a Triangle.
  • Wave 2 must be less than Wave 1 by price.
  • Wave 3 of a LD must be an Impulse.
  • Wave 3 of an ED must be a Zigzag family pattern.
  • Wave 3 must be greater than Wave 2 by price.
  • Wave 4 may be any corrective pattern.
  • Waves 2 and 4 must either overlap or be within 10% of length Wave 3 of doing so. All internal data points are considered.
  • The time taken by Wave 4 must be between 10% and 10 times the time taken by Wave 2.
  • Wave 5 of an ED must be a Zigzag family pattern.
  • Wave 5 of a LD must be an Impulse or ED.
  • If Wave 1 is a LD then Wave 5 cannot be an ED.
  • Wave 3 must not be shorter than both Waves 1 and 5.
  • Wave 5 must be at least 80% of Wave 4 by price.
  • Wave 5 is never the longest when compared with Wave 1 and Wave 3.
  • Wave 5 is always less than Wave 3 by price.
  • The intersection of the channel lines must be beyond the end of the pattern.
  • Diagonals must move within the two channel lines or be within 10% of gross movement.
  • Channel lines must converge, slope in the same direction and neither be horizontal.
  • The maximum number of pattern lengths into the future that the channel lines intersect is 4.
  • The minimum time for Wave 5 is 10% of Wave 4. The maximum time for Wave 5 is 5 times Wave 3.

Diagonal Guidelines:

  • Wave 1 of a LD is usually an Impulse, but in rare cases may be a LD.
  • Wave 2 is usually ZigZag family pattern.
  • Generally Wave 2 is greater than 35% of Wave 1's gross price movement.
  • Wave 4 is commonly a Zigzag.
  • It is rare that at least either Waves 2 or 4 of an ED is not a Zigzag family pattern.
  • Generally Wave 4 is greater than 35% of Wave 3's gross price movement.
  • The end points of Waves 1 and 4 generally overlap.
  • Expect the time taken by Wave 4 to be between 20% and 5 times Wave 2.
  • Wave 5 is usually greater than Wave 4 by price.
  • It is typical for Wave 5 of a LD to end before reaching the channel line.
  • It is typical for Wave 5 of an ED to exceed the channel line.

Triangle Rules:

CT = Contracting Triangle, ET = Expanding Triangle

A Triangle is a common 5 Wave pattern labeled A-B-C-D-E that moves counter-trend and is corrective in nature. Triangles move within two channel lines drawn from Waves A to C, and from Waves B to D. A Triangle is either Contracting or Expanding depending on whether the channel lines are converging or expanding. Expanding Triangles are rare.

  • Wave A of a CT is always either a Zigzag based pattern or a Flat. Wave A of an ET can only be a Zigzag based pattern.
  • Within Wave A of a CT, Wave B must be less than 105% of Wave A's price length. The same rule applies for Waves C and D of the CT.
  • Wave B must be a Zigzag based pattern.
  • Wave C of a CT can be any corrective pattern except a Triangle. Wave C of an ET must be a Zigzag based pattern.
  • Wave B of a CT must retrace Wave A by 50%.
  • For a CT, Wave C must be less than Wave B by price and Wave C must be greater than or equal to 50% of Wave B by price.
  • For an ET, Wave B must be less than Wave C by price and Wave B must be greater or equal to 50% of Wave C by price.
  • Wave D of a CT can be any corrective pattern except a Triangle. Wave D of an ET must be a Zigzag based pattern.
  • Wave B, C and D must not move more than 10% beyond the A-C & B-D channel lines (based on the length of Wave C).
  • In an ET, Wave C must be less than Wave D by price and Wave C must be more than 50% of Wave D by price.
  • In an ET, Wave A must move within the A-C channel or pass through it by no more than 10% of the length of Wave B by price.
  • In an CT, Wave D must be less than Wave C by price and Wave D must be greater than or equal to 50% of Wave C by price.
  • The intersection of the channel lines must occur beyond the end of a CT, and before the beginning of an ET.
  • The channel lines must either converge or diverge. They cannot be parallel.
  • Wave D of a CT must not end such that when retraced 25% by E, E will not reach the price territory of A.
  • Only one channel line in a CT may be horizontal. Neither channel line of an ET can be horizontal.
  • The maximum time for Wave D is 4 times Wave C.
  • Wave E of a CT can either be a CT or a Zigzag family pattern. For an ET, Wave E must be a Zigzag based pattern.
  • In an ET, Wave E must be greater than Wave D by price and Wave D must be greater or equal to 50% of Wave E by price.
  • In an ET, either Wave A or B will be the shortest Wave in the pattern.
  • In a CT, Wave E will be less than Wave D by price and Wave E will be greater than or equal to 25% of Wave D by price.
  • In a CT, either Wave A or B will be the longest Wave in the pattern.
  • In a CT, the maximum time for Wave E is 4 times Wave C.
  • Wave E must end in the price territory of A.
  • Wave E must not pass through the B-D line, or if it does, by no more than 10% of the length of Wave D.
  • The maximum number of pattern lengths into the future that the channel lines intersect is 6.

Triangle Guidelines:

  • Wave A is usually a zigzag family pattern.
  • Wave B is usually a zigzag family pattern.
  • Wave C is often a zigzag family pattern.
  • Wave C usually takes more time than any other Wave in the pattern.
  • Wave D is usually a zigzag family pattern.
  • Waves B, C and D rarely move outside the B-D line.
  • Waves A, B, C and E rarely move outside the A-C line.
  • Wave E is usually a zigzag family pattern or the same type of Triangle as the larger pattern.
  • Usually at least two Waves travelling in the same direction will relate by about 61.8%.
  • It is common for two or more adjacent Waves will be related by 61.8%.
  • In a CT, Wave E normally retraces Wave D by about 70%.

Double and Triple ZigZag Rules:

Double (DZ) and Triple (TZ) Zigzags are similar to Zigzags, and are typically two or three Zigzag patterns strung together with a joining Wave called an x Wave, and are corrective in nature. Doubles are not common, and Triples are rare. Zigzags, Double Zigzags and Triple Zigzags are also known as Zigzag family patterns, or 'Sharp' patterns. Double Zigzags are labeled w-x-y, while Triple Zigzags are labeled w-x-y-xx-z. Both these patterns are included in the list of rules and guidelines below. Only a Double Zigzag is illustrated below.

  • Wave W must be a Zigzag.
  • Wave C of W cannot be a failure.
  • Wave X can be any corrective pattern except an ET.
  • Wave X must be smaller than Wave W by price.
  • Wave X must retrace at least 20% of W by price.
  • The gross price movement of Wave X must be less then 3 times the price movement of Wave W.
  • Wave X must be no more than 5 times Wave W by time.
  • Wave Y must be a Zigzag
  • Wave Y must be greater than or equal to Wave X by price.
  • Back to back and double failures are not allowed.
  • Wave Y must be greater than 90% of Wave W by price, and Wave Y must be less than 5 times Wave W by price.
  • Wave Y must be no more than a factor of 5 times either Wave X or W in price or time.
  • Wave C of Y cannot be a failure.
  • Wave XX can be any corrective pattern except an ET.
  • Wave XX must be smaller than Wave Y by price.
  • Wave XX must retrace at least 20% of Y.
  • The gross price movement of Wave XX must be less than 3 times the gross movement of Wave W.
  • Wave Z must be a Zigzag
  • Wave Z must be greater than or equal to Wave XX by price.
  • Wave Z must be less than 5 times Wave Y by price, and must also be less than 5 times Wave W by price.
  • Wave Z must be no more than a 5 times either Waves XX, Y, X or W in both price and time.

Double and Triple ZigZag Guidelines:

  • The largest Wave in Wave W is usually less than Wave W by price.
  • Wave X is usually a Zigzag family pattern.
  • Wave X is usually less than 70% of Wave W by price.
  • Wave X will usually retrace at least 30% of Wave W.
  • Wave X is most likely to be a 38.2% retracement of Wave W.
  • Wave X is next most likely to be a 50% retracement of Wave W.
  • Wave X is next most likely to be a 61.8% retracement of Wave W.
  • The largest Wave in Wave X is usually less than 140% of Wave W by price.
  • The time taken by Wave X is usually between 61.8% and 161.8% of Wave 1.
  • Wave Y is next most likely to be equal to 61.8% or 161.8% of W by price.
  • Expect the time taken by Wave Y to be between 61.8% of Wave W and 161.8% of shortest of Wave W and X.
  • Wave XX is usually a Zigzag family pattern.
  • Wave XX is usually less than 70% of Wave Y by price.
  • Wave XX will usually retrace at least 30% of Wave Y.
  • Wave XX is most likely to be a 38.2% retracement of Wave Y.
  • Wave XX is next most likely to be a 50% retracement of Wave Y.
  • Wave XX is next most likely to be a 61.8% retracement of Wave Y.
  • The largest Wave within Wave XX is usually less than 140% of Wave Y by price.
  • Wave Z is most likely to be about equal to Wave Y by price.
  • Wave Z is next most likely to be about equal to 61.8% or 161.8% of Wave Y.
  • The largest Wave in Wave Z is usually less than Wave Y by price.

Double and Triple Sideways Rules:

Double (D3) and Triple (T3) Sideways patterns are similar to Flats, and are typically two or three corrective patterns strung together with a joining Wave, called an x Wave, and are all corrective in nature. Doubles are not common, and Triples are rare. Doubles are labeled w-x-y, while Triples are labeled w-x-y-xx-z. Both these patterns are included in the list of rules and guidelines below. Only a Double 3 is illustrated below.

  • Wave W may be any corrective pattern except a Triangle, double or triple.
  • Wave C of W cannot be a failure.
  • Wave X may be any corrective pattern except a Triangle, double or triple.
  • The minimum X Wave retracement is 70% of Wave W.
  • The maximum price distance of Wave X is 150% of both the previous Wave and ensuing Wave. All internal data points are considered.
  • Although there is no minimum time for Wave X, the maximum time is 10 times the time taken by Wave W.
  • Wave Y may be any corrective pattern except double, triple or a Triangle in a Triple Zigzag. However, Wave Y cannot be a Zigzag if Wave W is a Zigzag.
  • Wave Y must be greater than or equal to Wave X by price, except if Wave Y is a Triangle.
  • Wave C of Y cannot be a failure.
  • Wave Y must be no more than 5 times either Wave X or W in price and time.
  • Wave Y has no minimum time constraint.
  • Wave XX may be any corrective pattern except a Triangle, double or triple.
  • The minimum Wave XX retracement is 70% of Wave Y.
  • The maximum Wave XX retracement is 150% of previous Wave and ensuing Wave. All internal data points are considered.
  • Wave Z may be any corrective pattern except double or triple. However Wave Z cannot be a Zigzag if Y is a Zigzag.
  • Wave Z is greater than or equal to XX by price.
  • Wave Z must be no more than 5 times either Waves XX, Y, X or W in price and time.
  • Back to back and double failures are not allowed.
  • If Wave Y is greater than Wave W by price, then the maximum Wave Z price movement is twice the price movement of Wave W.

Double and Triple Sideways Guidelines:

  • The largest Wave in Wave W is usually less than 140% of Wave W by price.
  • Wave X is usually a Zigzag family pattern.
  • The largest Wave in Wave X is usually less than Wave W by price.
  • Wave X is usually less than 140% of W by price.
  • Wave X is usually greater than 95% of Wave W by price.
  • The most likely retracement for Wave X is 110% of Wave W.
  • Time for X is generally between 62% of W1 and 1.618 of the time of W1.
  • If Wave Y is a Triangle, the most likely length of Wave Y is about 61.8% of Wave W. If Wave Y is not a Triangle, the most likely lengths for Wave Y are 100% of Wave W, 161.8% of Wave W and 10% of the length of Wave W beyond the end of Wave W.
  • The largest Wave in Wave Y is usually less than 140% of Wave W by price.
  • Wave Y is usually less than twice the longest of Wave W and Wave X in price.
  • Wave Y is generally between 61.8% of Wave W and 161.8% of Wave W in time.
  • Wave XX is usually a Zigzag family pattern.
  • The largest Wave in Wave XX is usually less than Wave Y in price.
  • Wave XX is usually less than 140% of Wave Y by price.
  • Wave XX is usually greater than 95% of Y by price.
  • The most likely retracement for Wave XX is 110% of Wave Y.
  • If Wave Y is a Triangle, most likely length by price is 61.8% of Wave W. If Wave Y is not a Triangle, then the most likely lengths are 100% of Wave W, 161.8% of Wave W and 10% of length of Wave W beyond the end of Wave W, all by price.
  • The largest wave in Wave Z is usually less than 140% of Wave Y by price.
  • Wave Z is usually less than twice the longest of Wave Y and Wave XX.


Monday, October 21, 2013

Learn Elliott Wave Theory in 10 minutes


“Elliott Wave Principle” by Frost & Prechter - 10th Ed. (2005)

Additionally, over a period of time, I’ve inserted several pointers from reading and/or viewing numerous Elliott Wave educational materials presented by Wayne Gorman, Jeffrey Kennedy, Dave Allman, Dan Esconi, Rich Swannell, and others.

Chapter 1 – The Broad Concept:
The Basics:

· Ralph Nelson Elliott’s (1871-1948) Wave Principle states that repetitive forms (waves) within the financial markets are generated by man’s social nature/mass psychology, which is keyed to a mathematical law of nature, which is expressed by the Fibonocci sequence, and more specifically, the golden ratio (.618 & its inverse, 1.618). These forms/waves grow and decay independent of news.
· Progress (referred to in “Elliott” as motive & actionary waves) occurs in 5 waves, of which waves 2 and 4 are countertrend interruptions. Regress (corrective/reactionary waves) occurs in 3 waves, with wave 2 being an interruptive wave. The complete advance and decline cycle is therefore 8 waves.
· The basic 8 wave form is fractal in nature. It is operating at all degrees (chart timeframes) simultaneously. See the Elliott Wave labeling system (p.27).
· In most impulses there is a 5-wave pattern which unfolds adhering to the following rules:
- subwave 2 does not overlap the start of wave 1.
- subwave 4 does not overlap the extreme of wave 1. Also, as a strong guideline, it is not advisable to assign a wave 4 label if there is any overlap of the territory of wave 1 thru 2.
- subwave 3 is not the shortest of 1, 3 & 5
· Impulses are typically bound by parallel lines (p.30)
· In impulses, one of waves 1, 3 or 5 will likely extend substantially in comparison to the other two. In the stock market, wave 3 is most likely to extend, whereas in commodities, wave 5 is the more likely to extend.
· Rarely, a wedge shaped diagonal appears as wave 1, A, 5 or C. It is sometimes referred to as a diagonal triangle. In a diagonal, both trendlines slope/tilt in same direction (both up or both down). Most often, the trendlines lines converge (get closer together) as they extend. Sometimes the diverge (get further apart with time).
· Corrective waves come in 3 basic variations:
o zigzag (5-3-5)
o flat (3-3-5)
o triangle (3-3-3-3-3)
· Corrective waves can combine into more complex combinations labeled W-X-Y or W-X-Y-X-Z.
· In impulses, wave 2 & 4 nearly always alternate in form, one being of the sharp (zigzag or zigzag combo) family, and the other being of the sideways (flat, triangle or mixed combo) family.
· Each wave label exhibits a unique personality, characterized by volume, momentum, and sentiment.

· Sometimes the pattern’s end differs from the associated price extreme. Always label and draw trendlines & fibonacci’s correctly by using the orthodox (labeled) end of waves.

Impulse Waves:
  • Extension: in impulses, usually just one of waves 1, 3 or 5 extend. Wave 3 is the most likely to extend. Rarely, both 3 and 5 extend. Extensions can occur within extensions. For instance 3 of 3. Sometimes, at the end of an impulse in which one of the waves extended, there are 9 total waves, and it is difficult to determine which wave extended. There also can be extensions within extensions. 5 in extension manifests itself as 9, 13, 17, etc. 3 in extension can appear as a 7, 11, 15, etc. If neither wave 1 or 3 is extended, expect wave 5 to extend, especially if volume is greater in the 5th than the 3rd.
  • Truncation: when the 5th wave does not reach beyond the 3rd wave. Occurs most often after a particularly strong 3rd wave. The wave 5 must still contain the necessary 5 subwaves. The message truncations send is that there is tremendous pressure to start the new trend. Expect big moves after truncations.
  • Diagonal: subdivides 3-3-3-3-3. Notated with digits 1-5. Signals an imminent major trend reversal.
    • An ending contracting diagonal appears at the termination point of larger movements, most often as wave 5, and rarely as wave C. An expanding diagonal has only occurred only once in the stock market. Wave 5 often over-shoots, and upon rare occasion, falls short of its resistance trendline. If it does fall short, the reversal will be more severe. Ending diagonal triangles indicate exhaustion of a larger pattern that moved too far too fast. Ending diagonals are usually followed by a quick thrust which retraces to the starting level of the diagonal.
    • A leading diagonal (3-3-3-3-3) occasionally appears in the wave 1 (or A of zigzags) position. There are 2 only historical instances where there was a diagonal triangle Type II which sub divided 5-3-5-3-5, in which case is was a wave A of a zigzag ABC bear market rally that was preceded and followed by strong downward movements. Beware: what appears to be a leading diagonal is usually a 1-2-1-2 instead. Leading diagonals are typically deeply retraced, and if in wave 1 position, are typically followed by a zigzag retracement of 78.6%.
    • Wave 3 is never a diagonal.
  • Most Typical Impulse Fibonacci Ratios/Multiples (from Chapter 4: Ratio Analysis):
    • If wave 1 is extended, expect the net of wave 2-5 to be .618 x wave 1
    • Wave 2 = 618 or .5 x wave 1
    • If wave 3 is extended waves 1 and 5 tend toward equality, or a .618 relationship is next most likely.
    • Wave 3 = 1.618 or 2.618 x wave 1
    • Wave 4 = .382 x wave 3
    • Wave 4 (net) typically relates to its corresponding wave 2 (net) by a Fibonacci ratio.
    • Wave 5 = to wave 1, or .618 or .382 x the net of waves 1 thru 3.
    • If neither wave 1 or 3 is extended, expect wave 5 to be 1.618 x the net of 1-3.
    • The time to complete waves 1 thru 3 = the time to complete the end of 3 to the end of 5.
Corrective Waves:
  • Corrective wave are more varied than impulse waves, contain choppy overlapping waves, and are more difficult than impulses to count correctly in real-time. They are generally not high-confidence areas in which to make predictions. Avoid things that can hurt you!
  • Corrective waves are never 5’s.
  • An initial 5-wave move against the larger trend is never the end of the correction, only a part of it.
  • Corrective moves come in two styles, which almost always alternate in waves 2 & 4:
    • Sharp: steeply angled, made up of a zigzag, or double or triple zigzag. Usually .618 or .500.
    • Sideways: horizontal in nature. Consists of a flat, a triangle, a double three, or a triple three. Triangles never appear alone as wave 2. The final move of sideways corrections always “correct” the extreme of the preceding wave by at least one pip., and typically contain a movement back to or beyond its starting level, often creating a new high or low during the phase.
  • Corrective patterns fall into 3 categories:
  • Zigzag (5-3-5) sharp. Most common in wave 2’s. If the 1st zigzag doesn’t retrace sufficiently, there may be a double or triple zigzag. Wave B will not surpass the origin of A. C moves well beyond the extreme of A. Zigzag and double and triple zigzags produce a persistent move against the larger trend.
  • Flat (3-3-5) sideways. Most common in wave 4’s. There are 3 types:
    • Regular Flat: B terminates near the start of A. C terminates slightly beyond the end of wave A.
    • Expanded (Irregular) Flat: (actually far more common than reg. flat). B terminates beyond the start of A, and C ends more substantially beyond the end of wave A. Bear market expanded flats may be referred to as an inverted expanded flat.
    • Running Flat: (very rare). B terminates well beyond the start of A, but C falls short of the end of wave A. BEWARE: if B breaks down into 5 waves, it is more likely a wave 1 of an impulse of the next higher degree. A Running Flat (sometimes referred to as an Irregular Flat – Type II by Prechter) essentially exhibits a failure (truncation) in wave c, and although rare, usually appears as a wave 2, because wave 3 just can’t wait to get underway.
  • Triangle (3-3-3-3-3) sideways. Triangle waves are notated with letters A through E, and consist of 5 overlapping waves. Indicate a triangle on your chart by drawing trendlines connecting A & C, and B & D. Triangles take up a lot of time. Wave E will likely over or under-shoot the trendline. If E overshoots, it cannot surpass the extreme of C. If it does, it is not an E wave in a triangle. At wave E’s end, all triangles affect at least a one pip corrective result from the end of the preceding wave (wave 3, for instance). There is usually a post-triangle terminal thrust from the extreme of E equal to the width of the trendlines at the starting point of the triangle. Most subwaves are zigzags, although wave C is often a more complex double zigzag. One of the subwaves (usually E) can itself be a triangle, which results in labeling of A-B-C-D-E-F-G-H-I. Triangles always occur in a position prior to the final wave in the pattern of one larger degree, most often wave 4 of an impulse, but also B of an ABC, or the final X in a double or triple three. A triangle may also occur as the final actuary pattern in a corrective combination. Triangles never appear alone as wave 2. If wave B makes a new high or low, it is called a running triangle. There are 3 types of triangles:
    • Contracting – the upper trendline is sloping down, the other up. (If B overshoots A, it’s called a running contracting triangle).
    • Barrier (either the upper or lower line is virtually horizontal). The horizontal line will be the line that will be broken after the E wave is complete.
    • Expanding ( the upper & lower trendlines diverge, the upper sloping up, the other down). Wave E must move beyond the extreme of C in Expanding Triangles.
  • There can be combinations of corrective patterns. Combinations are generally horizontal in nature. Each pattern within the combination is connected by a 3-wave corrective movement (most often a zigzag) labeled X. Each “three” in combinations can be a zigzag or flat. Triangles only appear as the final wave in combinations. The forms generally alternate. There is never more than one zigzag or triangle in a combination. The two types of corrective combinations are:
    • Double three (labeled W-X-Y). Extends the duration of the correction.
    • Triple three (labeled W-X-Y X-Z) (rare). Extends the duration even further.
  • If there are a number of similar waves in a row that are difficult to label, remember that a double zigzag will have 7 waves, and triple zigzag has 11.
  • Sometimes volume spikes at the end of corrections, but more often it drops off.
Chapter 2 – Guidelines of Wave Formation:
(Guidelines aren’t rules, they guide to what is probable)

Alternation: (expect a difference in the next expression of a similar wave):
  • If wave 2 is sharp, expect wave 4 to be sideways, and vice versa, except inside triangles, where alternation of 2 & 4 does not occur.
  • If wave 2 is sideways, a triangle can appear as wave 4 and still fulfill alternation, but this less likely. (Triangles alternate with everything else).
  • If wave 2 is simple, expect wave 4 to be a complex combination, and vice versa.
  • One of the 2 corrective waves within an impulse will likely retrace the entire last impulse (of one lesser degree?), the other will not.
  • Extension is an expression of alternation. Typically wave 1 is short, 3 long, and 5 short. If wave 1 is extended, 3 and 5 will likely not be extended. If 1 and 3 are not, 5 will likely be.
  • Within corrective ABC waves, if A is a flat, expect B to be a zigzag and vice versa. If A is simple, expect B to be a more complex combination, and C even more complex, or, the complete reverse: most complex-complex-simple, although this is not as common as increasing complexity.
  • Rich Swannell, in his Elite Trader Secrets book contends that alternation only takes place 61.8% of the time. He contends that the culprit causing this somewhat low percentage is that when wave 2 is sideways, there is a 78% chance that wave 4 will be sideways as well!! In his 20 years of research, this is the only significant statistical anomaly he found comparing realtime analysis to Elliot’s original guidelines.
Depth of Corrective Waves:
  • Corrections (especially 4th waves) tend to retrace to within the span of the previous 4th wave of one lesser degree.
  • If the 1st wave of a sequence extends, the correction following the 5th wave of the sequence will retrace no further than the extreme of wave 2 of a lesser degree (wave 2 of the 5th).
  • After 5th wave extensions, the ensuing correction will likely be sharp and swift, and will end near the extreme of wave 2 of the extension. This does not apply when the market is ending a 5th wave simultaneously at more than one degree.
Wave Equality:
  • 2 of the motive waves in a 5-wave sequence tend toward equality in time and magnitude. If equality is lacking, a .618 relationship in next most likely. Usually wave 3 is extended, so wave 1 and 5 are often nearly equal in amplitude and duration.
  • Waves A and C of a correction tend toward equality. C = 1.618 x A is next most likely.
Channeling:
  • A parallel trend channel typically marks the upper and lower boundaries of impulse waves.
  • When wave 3 ends. Connect 1 & 3, and place a parallel line thru 2. This provides an estimated boundary for wave 4. When wave 4 ends, connect 2 & 4, and place a parallel line thru 3. This will forecast the end of wave 5. If wave 4 moves out of the channel, expect wave 5 to be a throw-over. (WG) Alternative method for projecting the end of wave 5: if wave 3 is abnormally strong (vertical) and wave 4 is sideways, connect 2 and 4, and draw a parallel line that intersects the extreme of wave 1. This will project the end of wave 5.
  • Trendlines can also help with zigzags. Connect the origin of A with point B, and place a parallel line through point A. This will project the end of C. (Wayne Gorman)
  • Remember: It’s not over until wave 5 of 5 of 5 is finished. The wave count takes precedence over channel lines and projected Fibonacci targets.
  • Wave 5’s can “throw-over” or “throw-under”, depending on volume. During a “throw-over”, it is difficult to identify waves of smaller degrees, as channels lines are penetrated.
Volume:
  • Late in a corrective phase, a decline in volume often indicates a decline in selling/buying pressure, and coincides with a turning point in the market.
  • Of the impulse waves, 3rd waves almost always exhibit the greatest volume. If volume during the 5th wave is as high as the 3rd, expect an extended 5th wave.
  • Volume during corrective patterns will generally dry up during triangles and combinations, and will climax during A waves, and during wave 3 of C.
The “Right Look”
· If wave 4 terminated well above the top of wave 1 in a 5-wave move, it must be labeled as an impulse.
· It is extremely dangerous to accept a wave count that represents disproportionate wave relationships or a misshapen pattern.
· The right look may not be evident at all degrees of trend simultaneously, so focus on the degrees that are the clearest.
· You need short term charts to analyze subdivisions in fast moving markets, and long term charts for slowly moving markets.
· When re-working your count, always start from a significant bottom. (WG)
· Movements with the larger trend subdivide into 5. Movements against the larger trend subdivide into 3. (DA)
· The belief that there is only one direction the market can take, and the refusal to consider alternatives is a recipe for trouble. (DA)

· Its not over until the 5th of the 5th of the 5th of the 5th is complete. Confirmation that a trend change has occurred of a certain degree comes with a 5-wave move of one lesser degree in the opposite direction.

Wave Personality:
  • At times, more than one wave count is admissible, making wave personality invaluable in determining the preferred count:
  • 1st Waves: unfold in a 5-wave impulse. Part of a basing process. “Maybe we’ll actually survive this after all.” Most, however do not believe that the trend has changed.
  • 2nd Waves: unfold in a 3-wave corrective fashion, and usually deeply retrace wave 1. The masses are convinced that the old trend is still in force, and pessimism is even worse than the origin of 1. “Here we go again.” Wave 2’s end up exhibiting low volume/volatility, with sentiment (the put/call ratio) at its low. Wave 2’s provide a great trading opportunity!
  • 3rd Waves unfold as a 5, and are strong, broad, and steep. Optimism returns. Economic fundamentals improve. At about the middle of wave 3, there is mass recognition that a new trend is underway. This is when volatility is at its highest. MACD will usually confirm wave 3 peaks.
  • 4th Waves unfold as a 3, and are predictable in depth and form due to alternation from the 2nd wave. They are very likely sideways affairs, and are building a base for the final 5th wave. They are accompanied by a surprising disappointment because the advance did not continue.
  • 5th Waves unfold as a 5, and are less dynamic than wave 3’s, unless the wave 5 is an extension. Volume is less than wave 3, but optimism/pessimism is at its highest, although fundamentals aren’t as good. Wave 5’s are typically accompanied by MACD divergence. FYI: wave 5’s in commodities are stronger than wave 3’s, and are driven by fear.
  • A Waves unfold as 5’s if the beginning of a zigzag, or 3’s if the beginning of a flat or triangle. Arrogance and complacence is lingering. Most are convinced that it is just another pullback before the larger trend continues, although they are often sharp, and can retrace more than the previous impulse wave. A waves following extensions on commodities are often crashes. A waves do not kill the hopes associated with the old trend though. MACD will be deeper at the end of A waves than it was during the previous waves 2 or 4.
  • B Waves unfold as 3’s, and are sucker plays, especially in expanded/irregualar flats. The masses believe the up trend has resumed. Wave B’s are usually zigzags, and the next most likely is a triangle.
  • C Waves unfold as 5’s (unless part of a triangle, or rarely a diagonal), and are strong like a wave 3. The illusions held through A and B quickly evaporates into fear. Near the end of C, the corrective phase will be widely mistaken for a new overall trend.
  • D Waves are 3’s are accompanied by expanding volume, and are phonies, like wave B’s.
  • E Waves are 3’s, and are often mistaken as a kickoff of a new trend (because of the typical throw-over). News often coincides with the overshoot, and caused the masses to join the wrong side of the trade at the worst moment.
  • X Waves connect corrective waves into combinations, and consist of any type of 3 wave corrective structure, but are most often a zigzag. An X, being a 3 wave move, signals that the correction is not over yet.
Fibonacci Relationships (from Chapter 4: Ratio Analysis):
  • Fibonacci relationships of waves moving in the same direction are more important than Fibonacci retracements.
  • The most typical corrective Fibonacci Ratios are:
    • In a zigzag, C = A, or 1.618 x wave A, or .618 x wave A (in that order)
    • In a regular flat, A, B & C are each nearly equal
    • In an expanded flat, B = 1.236 or 1.382 x A
    • In an expanded flat, C = 1.618 x A (very common!) Sometimes C will overshoot A by .618 x A.
    • In a contracting triangle, B = .618 x A, C – .618 X B, and D = .618 x C.
    • In an extremely rare expanding triangle, the ratio is 1.618.
    • In double and triple corrections, the net travel of one simple pattern related to the next by equality, or if one of the 3’s is a triangle, by .618.
  • Rich Swannell’s research showed that stock market wave 2’s are most likely to retrace wave 1 by 38.2%, and are about twice as likely to retrace 38.2% than 61.8%. 2nd waves are widely varied in the percentage that they retrace.
  • Wave 4 retracements of wave 3 are generally more predictable. A .382 retracement is most common, and as little as a .236 is next, especially if it is a wave 4 of larger wave 3. Also, wave 4’s very often retrace to the about the end of the previous wave 4 of a lesser degree, for instance wave 4 of a larger wave 3.
  • The 5th wave, if the longest, typically travels 1.618 the distance of from the start of wave 1 thru the end of wave 3.
  • Wave 3 will often be 1.618 x the length of wave 1. 2.618 is also common.
  • Wave 5 will often be equal to wave 1 if wave 3 is extended.
  • Prechter, despite mighty efforts, has not been able to produce anything useful as far as Fibonacci time relationships. Check out Corolyn Boroden or Glenn Neely’s work for that.
Percentage Retracements and Extentions (from Rules and Guidelines – p. 86-91)
  • In a diagonal, waves 2 & 4 each usually retrace .66 to .81 of the preceding wave.
  • In a zigzag, wave B typically retraces 38-79 percent of wave A.
  • In a zigzag, if wave B is a running triangle, it will typically retrace 10 to 40 percent of wavc A.
  • In a zigzag if wave B is a zigzag, it will typically retrace 50 to 79 percent of wave A.
  • In a zigzag, if wave B is a triangle, it will typically retrace 38 to 50 percent of wave A
  • In a flat, wave B must retrace at least 90 percent of wave A. This is a rule.
  • In a flat, wave B usually retraces between 100 and 138 percent of wave A.
  • In a flat, wave C is usually 100 to 165 percent as long as wave A.
  • In a flat, when wave B is more than 105 percent as long as wave A, and wave C ends beyond the end of wave A, the formation is called an expanded flat.
  • In an expanding triangle, subwaves B, C, and D each retrace at least 100 percent but no more than 150 percent of the previous subwave. This is a rule.
  • In an expanding triangle, subwaves B, C, and D usually retrace 105 to 125 percent of the preceding subwave.
Memorable Quotes from Chapter 3 – Historical and Mathematical Background:
“When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” – Sherlock Holmes
“Trading with Elliott Wave Principle helps you remain both flexible and decisive, both defensive and aggressive, depending on the demands of the situation.”
“The Elliott Wave principle is a means of first limiting the possibilities, and then ordering the relative probabilities of possible future market paths.”
“Because applying the Wave Principle is an exercise in probability, the ongoing maintenance of alternative wave counts is an essential part of using it correctly.”

“Of course, there are often times when, despite a rigorous analysis, there is no clearly preferred interpretation. At such times, you must wait until the count resolves itself.”

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