Elliot's theory. Understanding the Basics of Trading with Elliott Wave Theory

Approximately nine out of ten traders, when faced for the first time with the Elliott Wave theory, stop further acquaintance with it and move on to studying simpler trading. They can be understood because Elliott waves are a subjective trading tool, and their practical application is sometimes so confusing and contradictory that ten analysts can give ten completely opposite predictions. However, those traders who perfectly master this analytical tool can no longer do without it. With the help of Elliott waves, you can confidently say when it will happen, as well as easily determine the entry point - all this makes this strategy very profitable. As for the complexity of the analysis of Elliott waves, we offer a simplified trading model using this tool. In addition, there are now various Elliott Wave indicators that make it much easier to find waves on a chart in real time. See also if you are still undecided about choosing a reliable brokerage company.

Elliott Wave Theory

The founder of the wave theory is the accountant Ralph Elliott, who worked for the railway company. Analyzing the price fluctuations of the exchange market, he came to the conclusion that they are not as chaotic as they might seem at first glance, and are subject to certain patterns. According to Elliott, at the heart of any financial market, no matter which one - exchange, commodity, stock or foreign exchange, are the emotions of investors and that form repeating cycles called waves. A little later, he detailed his idea in the book "The Wave Principle", which caused a lot of controversy among followers of the wave theory and its opponents. Ralph Elliott believes that any movement in the market is subject to an eight-wave pattern, consisting of five impulse waves and three corrective ones. Its advantage lies in the fact that, having identified the beginnings of this pattern on the chart, one can confidently say in which direction the price will move, where it is necessary to enter a deal, and where the profit should be taken. The disadvantage of wave theory is that it is not easy to determine the start of the wave pattern in real time. We hope that, having studied the theory of Elliott waves, you will learn how to find a wave pattern on the charts of different ones, and the Elliott Wave indicator will help you with this in the first stages of acquaintance with this analysis tool.

Elliott Wave Pattern

So let's start by learning the basics of Elliott Wave Theory. This is what the classic eight-wave pattern looks like:

Do not be alarmed, everything is not as scary as it might seem at first. As we wrote earlier, this model consists of five impulse waves (1, 3, 5, a, c) and three corrective waves (2, 4, b). At the same time, impulse waves are trendy, so they should always be longer than corrective waves. By their nature, Elliott waves are fractal, in other words "self-similar". Fractals are structures, parts of which are considered a copy of a whole object. Examples include a snowflake, seashell, or cloud. How is this expressed in relation to Elliott waves? And the fact that each wave can be broken into smaller waves for younger ones. Look again at the picture. See how each large wave is made up of smaller waves that combine to form the Elliott Elliott Wave Pattern. See also which have the best trading conditions.

Elliott Wave Psychology

The main reason for the formation of new waves is the constant struggle between bulls and bears. Let's consider the psychological aspects of the Elliott Wave Theory in relation to the bullish trend.

First wave

As a rule, the first wave has a relatively weak momentum, since a small percentage of traders take part in the trade. Having reached a certain peak, traders begin to take profits, which leads to the appearance of a second wave, which is also corrective.

Second wave

At the point of formation of the second wave, many traders open short positions, but the strength of the bears is gradually weakening, and at the end of the movement of the second wave, the minimum prices of which are much higher than the point of origin of the first wave, bulls enter the market.

Third wave

This is the largest wave in terms of size. You can enter into purchases both immediately after the correction, placing under the low of the price, and when the high of the first wave is broken. At this time, the stop losses of those traders who mistakenly believed that they are facing a bearish trend usually occur. Realizing their mistake, they open buy, which leads to the strengthening of the impulse of the third wave, since at the moment there is a huge percentage of traders in the market.

Fourth wave

After a certain time, the impulse of the third wave begins to fade, traders fix the earned profit, which ultimately leads to the beginning of a new correction, which is called the fourth wave.

The fifth wave

At the end of the fourth wave, traders reopen purchases, as they are confident that the uptrend is not over yet. As a rule, these are those traders who did not have time to enter the market at the beginning of the third wave or watched from the sidelines. The momentum of the fifth wave is usually not as strong as that of the third wave, but the price still breaks its high, rushing up. By the end of the fifth wave, traders close buy orders and take profits. As a result, the interest of the “bulls” begins to weaken, and “bears” enter the market, which leads to a change. Thus, the first, third and fifth waves are impulsive, and the second and fourth waves are corrective. Usually, one of the impulse waves is extended, that is, its distance from the base point to the peak is much greater than the dimensions of the other waves. If earlier the fifth wave was considered an extended wave, now it is the third wave. By recognizing the signs of the emergence of the Elliott wave pattern, and entering the market at the bottom of the third wave or at the breakout of the high of the first wave, you can get a good profit from the trade.

ABC correction

If the first five waves, which are trendy in nature, are designated by numbers from one to five, then the subsequent correction is designated in the form of Latin letters: a, b, c, of which two waves are impulsive and one is corrective. Of course, the Elliott wave pattern is not only “bullish”, as in the figure below.

There is also a bearish Elliott Wave chart that looks like this:

In theory, an ABC correction looks like the pictures above, but in practice such a pattern is extremely rare. There are three types of Elliott corrective patterns most commonly encountered:

After the final formation of the ABC-correction, we can expect the continuation of the global trend or a change in the current trend. See also who they are.

In theory, everything looks quite simple, but what to do in practice when Eliot waves are not as correct and beautiful as in the pictures in the textbooks. However, there are guidelines to help you determine which wave the market is on now, when to open sell or buy, and when to take profits:

The second wave cannot be below the bottom of the first wave (for purchases) or above its maximum (for sales);

The third wave should not be shorter than the rest of the waves, as a rule, it clearly stands out among other waves;

The fourth wave is always above the highest point of the first wave (for purchases) and never crosses the price in the area of ​​the first wave;

The second and fourth waves very often retrace from strong Fibonacci levels, this can be used as a signal when opening trades;

The fifth wave most often breaks the high of the third wave, but sometimes it may not go beyond it, this is called the truncated Elliott wave pattern.

For an illustrative example, you can see what the Elliott wave model looks like for the EURUSD currency pair:

How to enter trades using the Elliott Wave theory?

As we mentioned above, the third wave is the largest in size among other waves, so we will look for an entry point after the second wave has finished correcting. Fibonacci levels will help us to determine the entry point. Read about what Fibonacci levels are and how to plot them on a chart. Let's say you saw that after a short correction, the price steadily rushed up. Perhaps this movement is the first wave of the Elliott pattern. To be sure of this, you need to wait for a pullback, which will be considered the second wave. As we can see in the figure below, a rollback really happened, but what to do next, where to open purchases?

Using the Fibonacci Levels tool, connect the upper and lower points of the first wave. As a result, we get levels from which the price can push off, which will become the impetus for the continuation of the upward trend. The figure below shows how the price bounced off the 50% level, which served as a signal for us to enter.

In this case, the stop loss should be placed just below the last local minimum. In terms of profit-taking targets, we know that the third wave is larger than the other waves. Therefore, you can take the distance of the first wave and postpone it from the entry point, this will be our take profit. When this level is reached, you can close half of the deal, and transfer the rest to. Once again, measure the distance of the first wave and multiply it by 1.5 times, this will be our second take profit. As we can see, we guessed the entry, the price went up again, forming the third Elliott wave.

Similarly, you can enter a trade at the beginning of the formation of the fifth wave, only our targets will be significantly lower. Conservative traders can enter trades not at the very beginning of the formation of the third wave, but when the high of the first wave is broken. See also which are ideal for Forex trading.

Elliott Wave Prophet - Best Elliott Wave Indicator

At first, it is quite difficult for a novice trader to determine the Elliott waves by eye, so you can use the Elliott Wave Prophet auxiliary indicator, which will tell you the location of the waves that have already formed, as well as predict the further outcome of events. The indicator is installed in the standard way described in this. After launching the indicator, a settings window will open, which indicates the number of waves that the indicator should find on the chart (by default, they are highlighted in blue), while the rest of the waves (in red) are "completed" by the Elliott Wave Prophet indicator. However, this indicator needs manual adjustment, since after being installed on the chart, it is in a distorted form. It is necessary to select the first wave of the indicator with the mouse and drag it to the place where, in your opinion, it should be located. If necessary, you can resize the wave by connecting the minimum and maximum points of the wave, and rotate it in different directions. Then you should wait for the price tick, and the indicator will adjust to the specified changes. Depending on the size and angle of the first waves, the Elliott Wave Prophet indicator will predict how events will develop further. In the left corner of the chart there is an information panel, where you can see the size of each wave in points, as well as their percentage. Download Elliott Wave Prophet Thus, the Elliott Wave theory allows you to determine which wave is on the chart and whether it is worth entering a trade. If the market is already in the fifth wave, then this indicates that the trend has already exhausted itself and will soon enter a correction state. In this case, it is too late to enter the market, it is better to wait until the correction is over and signs of an incipient trend appear. If you see that the market is experiencing the first wave of a trend, or the beginning of the third, then it's time to look for entry signals. Despite all the advantages of the Elliott Wave Theory, it is not worth applying it in its pure form. It can serve as an auxiliary tool for determining the trend, and it is best used in combination with or a trading system. As a rule, Elliott waves are plotted on daily or weekly charts, but since they are fractal in nature, you can look for them on lower timeframes as well. If after reading our article you still have doubts about the use of Elliott Waves, the book "The Elliott Code: Wave Analysis of the Forex Market", which was written by Dmitry Vozny, the only Russian researcher of wave analysis recognized abroad, will help you in mastering this method. This book differs from numerous other publications on wave analysis in that it is written in relation to the market and has many practical examples that will help you quickly master all the subtleties of wave analysis. Free download of the book "The Elliott Code"

If the technique is correct, its formula should fit on back side postage stamp. (with)

Often Elliott Wave Theory consider it difficult, but in fact, it is based on principles that can hardly be called such. Largely, the main provisions of the Elliott theory coincide with the principles Dow theory and classical methods of graphical analysis, but Elliott in his concept he went far beyond the traditional technical analysis of the Forex market. His theory makes it possible to see the full perspective of the market movement, and with its help you can easily explain the reasons why certain chart patterns are formed, and what they mean. Armed Elliott Wave Theory a trader can easily determine exactly where the market is in his cycle.

Three basic concepts Elliott wave theories are- model, ratio and time. It is customary to call a wave model the configuration that a combination of waves takes. Ratio analysis allows you to identify possible retracement levels and price targets by measuring the relationship between different waves. In addition, there are certain temporary connections between waves, which are the subject of wave analysis. They serve to validate wave patterns and wave relationships.

Let's consider an example of one complete cycle, which consists of eight waves - five upward waves and three downward waves (Fig. 1). Five waves make up the growth phase. Upward waves (1, 3, 5) called impulse waves... Downward waves 2 and 4 are developing in the opposite direction. Their called corrective waves, because they are correcting the movement of waves 1 and 3. After the growth phase is completed, a three-wave correction begins. Three corrective waves are marked in the figure with the letters "a", "b" and "c".

Almost as important a characteristic of waves as a stable pattern of their combination is the degree of the corresponding trend. There are numerous degrees of tendency. Myself Elliott, by the way, identified nine different levels of development of the trend, starting with the "Great Supercycle" and ending with the ultrashort degree, which exists for only a few hours.

The most important rule of the wave theory says: regardless of the degree, the trend will always develop along the main eight-wave cycle. Each wave is subdivided into smaller waves, which in turn also break into waves - to an even lesser extent. And from this it follows that each of the waves is actually a part of a larger one, the next in the wave hierarchy.

The market cycle, which includes the three main cycles of the Elliott Wave Theory, will look like this (Figure 2)

The complete market cycle consists of two large waves, 8 medium waves and 34 small waves. Then there are 144 very small waves, and so on. according to a series of Fibonacci numbers. A bull market consists of one big wave, 5 medium waves and 21 small waves. If we continue this list, then the next number of waves will be 89, etc. A bear market consists of one big wave, 3 medium waves and 13 small waves. This list can be continued with 55 very small waves, etc.

The ability to distinguish between three-wave and five-wave patterns is the basis practical application the theory of waves. All further actions of the trader depend on it. The number of waves dictates what to expect in the market. The formed five-wave configuration, for example, shows that only part of the movement of the larger wave has completed, that it will continue (unless it is the fifth wave in the structure of the fifth wave higher in the hierarchy).

The most important rule for interpreting wave structures is: a correction cannot consist of five waves. So, if a five-wave fall is observed with a general upward trend, it can be stated with a high degree of confidence that we are actually dealing with the first wave of a three-wave (a-b-c) fall, that is, the fall will continue. In a bear market, a downward trend should resume after a three-wave rise. A five-wave rally is a warning that a more significant upward movement in prices should be expected. Moreover, it may well be the first wave of a new bullish trend.

• WAVE 1

Almost half of the first waves originate at the bottom of the market. It is a kind of "bounce" from the lowest levels. The first wave is usually the shortest of the five. ...

• WAVE 2

The distance traveled by wave 1 is almost completely (or completely) covered by the move of wave 2. It is held above the base of the first wave, which entails the formation of various chart patterns, such as double or triple bottom or an inverted head and shoulders pattern. ...

• WAVE 3

The third wave is the longest and most dynamic. If wave 3 crosses the level of the top of the first wave, it denotes all types of classic breakouts and signals to open long positions. The third wave accounts for the most significant increase in trading volume, at this time numerous gaps appear on the charts. Wave 3 can never be shorter than any of the five.

• WAVE 4

The fourth wave has, as a rule, complex structure... Like wave 2, it is a phase of correction or consolidation, however, it differs from the latter in its structure. During the fourth wave, triangles often appear on the charts. According to the most important rule wave theory, the bottom of wave 4 never overlaps the top of the first wave.

• WAVE 5

During the fifth wave, many confirming technical indicators - such as On Balance Volume - begin to lag behind price movements. Also at this time, negative divergences begin to appear on some oscillators, warning of a possible approach of the market to the top.

Now, a few words about ABC correction.

If the first five waves, by their nature, are trendy, and they are designated by numbers from 1 to 5, then the correction following them is usually denoted in Latin letters: a, b, c, of which two waves are impulsive, and one is corrective.

Most often, three types of corrective patterns are found on charts:

Zigzag.

Note that sometimes a correctional pattern can consist of 2 or 3 interconnected zigzag patterns.

Range.

Often, lateral movement is observed after strong up or down movements. It can also be presented as a corrective Elliott pattern, where the bottom of wave C can coincide with the top of wave A, and the high of wave B can go beyond the bottom of wave A.

Triangle.

Also, a corrective pattern can be represented as triangles, which, as a rule, move against the trend or sideways. Triangles usually consist of five waves, and they can be narrowing, expanding, decreasing, increasing, or symmetrical.

Let's summarize the main points of wave theory, and then look at specific areas of their practical application.

— Full cycle A bull market consists of eight waves: five upward waves followed by three downward waves.

- The trend subdivides into five waves in the direction of the next longer trend in the hierarchy.

- Correction always consists of three waves.

- Simple corrections are of two types: zigzags (5-3-5) and flat waves (3-3-5).

- Triangles are usually formed on the fourth waves (this pattern always precedes the last wave). The triangle can also be corrective wave B.

- Any wave is part of a longer one and is subdivided into shorter ones.

- Sometimes one of the impulse waves is stretched. The other two must remain equal in time and extent.

- The mathematical basis of the Elliott Wave theory is the Fibonacci sequence.

Sometimes the wave structure clearly shows the possible movement of the market, sometimes it does not. When the course of the market is implicit, and they are trying to forcefully drive it into the framework of Elliott's theory, while completely ignoring other methods of technical analysis, then this can be called a real abuse of the method, which in other conditions can be quite useful. Alas, such abuse often leads to dire consequences. It is much wiser to relate to Elliott waves only as a partial answer to the eternal conundrum of market predictions. The effectiveness of wave theory only increases when it is used in conjunction with other analytical tools, and the chances of success are increased.

Finally, I would like to remind you that practical use of Elliott wave theory but without thorough preparation it is still not advisable, so be vigilant and hone your market analysis skills as much as possible before trading on a real account.

Prepared by specialists from Gerchik & Co

The Elliott Wave Theory is a development of the famous Dow Theory. It applies to any freely traded asset, liability or commodity (stocks, bonds, oil, gold, etc.). The theory of waves was put forward by the accountant Ralph Nelson Elliott in his monograph The Wave Principle, published in 1938.

After retiring during a serious illness, Elliott began studying the charts of market quotations in the hope of finding a method that would allow him to determine the patterns of the market. After doing serious work, he came to the conclusion that the market as a product mass psychology obeys some law.

The Elliott Wave Theory is based on some constant cyclical pattern in the behavioral psychology of people. According to Elliott, the behavior of market prices can be clearly identified and distinguished on the chart in the form of waves (a wave is a clearly distinguishable price movement). The Elliott Wave Theory states that a market can be in two broad phases - a bull market and a bear market.

Elliott also assumes that all price movements in the market are broken down into:

• five waves in the direction of the main trend (in Fig. 1 waves 1-5);
• three waves in the opposite direction (in Fig. 1 waves A, B, C).

In this case, the waves are divided into:

• impulse waves that create a directional trend (bullish or bearish) and set the market in significant movement (in Fig. 1 - waves 1, 3, 5, A, C);
• corrective waves (rollbacks), which are characterized by a movement against the trend (in Fig. 1 - waves 2, 4, B).

Picture 1.

The Elliott Wave Theory uses the principle of wave nesting. That is, any wave is part of a longer wave and is itself subdivided into shorter waves (Figure 2). Each wave is split into 3 or 5 waves. This breakdown depends on the direction of the larger wave of which it is a part.

The basic principle in Elliott's theory is that each impulse wave consists of five smaller waves, and each correction (countertrend) wave consists of three waves, as can be clearly seen in Figure 2. For example, Wave 1 in Figure 2 consists of 5 smaller waves. because it is an impulse wave that creates a trend.

The longest cycle according to Elliott's theory is called the Great Supercycle, which consists of 8 waves of the supercycle, these waves, in turn, also consist of 8 waves of the smaller cycle, etc. For example, Figure 2 shows 3 main loops. You can notice the proportionality of the impulse waves and the following correction waves. The stronger the impulse wave, the stronger the correction wave, and vice versa.

The tricky part of Elliott Wave Theory is identifying Waves. Corrective Waves are usually very difficult to identify.

Elliott Wave Theory and Fibonacci numbers

For the mathematical presentation of his theory, Elliott used the principle of Fibonacci numbers. Fibonacci numbers play important role in the structure of the complete market cycle described by Elliott waves. The number of waves forming a trend is the same as the Fibonacci numbers.

If you look closely at Figure 2, you will notice that the complete market cycle consists of two large waves, eight middle waves, 34 small waves. Likewise, if you look at the bear market, you can see that the big bearish supercycle consists of one big wave, five middle waves, 21 small waves. If we continue this list, then the next number of bearish waves will be 89, etc.

Accordingly, a large bullish supercycle consists of one large wave, three medium waves, and 13 small waves. If you go to an even lower level, then there are already 55 very small waves, etc.

Figure 2.

The usual application of this principle in the Elliott Wave Theory is based on the fact that movement in a certain direction must continue until it reaches a certain number in accordance with the Fibonacci summation sequence.

For example, a movement that lasts longer than 3 days should not apply until day 5. A movement lasting more than 5 days must last 8 days. The 9-day trend shouldn't end before day 13, and so on. This basic schema for calculating trend changes applies equally to hourly, daily, weekly, and monthly data. However, this is only an "ideal model", and no one can expect that the prices of goods will behave in such a definite and predictable way. Elliott noted that deviations can occur in both time and range, and individual waves are unlikely to always develop in these regular patterns.

Wave characteristics

Elliott Wave Theory calculations suggest some roadmap... Each wave has a set of characteristics. These characteristics are based on arrays of market behavior.

In the Elliott Wave theory, special attention is paid to the individual characteristics of each of the waves. In addition, there are certain rules for the proportions of constructing Elliott waves (table below). These rules help to correctly determine the moments of the beginning of the formation of waves and their duration. Wavelengths are measured from high to low of the corresponding wave.

The presented classical relations of waves among themselves are confirmed by the actual ones with an error of 10%. This error can be explained by the short-term influence of some technical or fundamental factors. In general, these ratios are rather arbitrary. It is also important that the ratio of the sizes of all waves to each other can take on the values ​​0.382, 0.50, 0.618, 1.618. Here you can calculate the ratios of both the heights and the duration of the waves. Let's consider the characteristics of each wave:

• Wave 1
  Occurs when the "market psyche" is almost completely bearish. The news is still negative. As a rule, it is very strong if it represents an abrupt change in the current situation (change of a bearish trend to a bullish one, a breakout of a powerful resistance level, etc.). V calm situation usually shows a slight price movement against the background of general indecision.

• Wave 2
  Occurs when the market pulls back sharply from a recent hard-won profit position. It can retrace almost 100% of Wave 1, but not below its start. Usually accounts for about 60% of Wave 1, develops against the background of a dominant predominance of investors who prefer to take profits.
• Wave 3
  This is what the Elliott people live for. There has been a sharp rise in investor optimism. It is the most powerful and long wave increase (can never be the shortest), at which there is an acceleration in prices and an increase in volumes. A typical Wave 3 is at least 1.618 times greater than Wave 1, and may be even larger.
• Wave 4
  It is often difficult to identify. It usually retraces no more than 38% of Wave 3. Its depth and duration is usually short. Optimistic sentiment still prevails in the market. Wave 4 should not overlap Wave 2 as long as the five-wave cycle is part of an end-triangle.
• Wave 5
  Often identified by momentum divergences. Price growth on average trading volumes. It takes place against the backdrop of massive public excitement. By the end of the wave, there is often a sharp increase in trading volumes.
• Wave A
  Most continue to believe that growth will soon continue with renewed vigor. But players have already begun to appear convinced of the opposite. The characteristics of this wave are often very similar to Wave 1.
• Wave B
  Often very similar to Wave 4 and very difficult to identify. Shows a slight upward movement on the remnants of optimism.
• Wave C
  A strong downtrend against the background of the general conviction about the beginning of a new downtrend. Meanwhile, some investors are starting to buy cautiously. It is characterized by high impulsiveness (five waves) and extension up to 1.618 times of wave 3.

Unfortunately, Elliott waves are very visible in the "old" market and are vaguely visible for the future. In this regard, the practical use of the Elliott wave theory is often problematic and requires special knowledge.

Elliott Wave Analysis It is very popular among traders, as it helps to quite accurately determine the further direction of price movement and make high profits.

Elliott Waves, named after the discoverer of this theory, are a fundamental element in the structure of the forex market. Analysis based on these waves is probably the most accurate. Although at the same time - this is one of the most difficult types of market analysis.

The wave structure of the market was first discovered in 1934 by the accountant Ralph Nelson Elliot. After several years of illness and retirement from work, he focused on studying the basics of the stock market. As a result of these studies, Elliott waves were discovered and the wave theory was developed.

While observing market trends, Elliott noticed that they obey certain sentiments resulting from the psychological perception of the situation by the traders. The market in different periods experienced six stages of psychological changes:

1. Expansion
2. Enthusiasm
3. Euphoria

After these three stages, the market fell into the following three:

1. Calming down
2. Decline
3. Depression

As a result of such changes, wave-like patterns are formed on the price charts. As it turned out, the construction of these waves has a completely logical pattern.

These observations formed the basis of the method, which is called the wave analysis of the market.

Basic postulates of wave analysis

Since the waves are located in a regular sequence, this makes it possible to predict the emergence of each new wave and, as a consequence, the direction of the trend. . This is the main postulate that characterizes the wave analysis of the Forex market and the behavior of prices on charts.

The main principle that is the basis of the wave theory is the principle of fractality. According to his definitions, a set of several waves of a smaller order located in a lower time interval forms one wave with a longer duration, which is located in a higher time frame.

In turn, this wave is part of a pattern of several waves in the process of forming even more large wave Elliot.

• Bearish tendency - when the trend is inclined to decline.
• Bullish tendency - when the price intends to rise.

The next principle, in accordance with which Elliott waves are formed, is that after active growth, a period of decline must necessarily follow.

The alternation of waves of different directions is a prerequisite for the formation of wave patterns. In addition, Elliott noticed one more circumstance - wave patterns also replace each other after the stages of price growth and fall.

A wave pattern forming a bearish trend is necessarily replaced by bullish sentiments in the market and, accordingly, a bullish wave formation.

Connecting with fundamental indicators, the author of this theory derived the axiom that no economic news can be a fundamental factor for the formation of a new trend in a long period.

And one more circumstance was taken into account when developing the theory of wave analysis and is used to this day - waves can start and end with different trading volumes and at different levels volatility. However, for individual waves, the patterns have peculiarities inherent in them:

• The second waves most often have a reduced volume.
• The third Elliott waves show usually high volume of trades.
• The fifth wave is one of the most dynamic

The application of this theory and the Elliott wave itself as a means of analysis can occur for different purposes.

Watch a short video to learn the basics of wave analysis:

Elliott Wave Categories

The classification by which Elliott Waves are distinguished includes the direction of the trend. In addition, all waves have their own specific meaning for the market and its analysis. Some of them are formed in the direction of the main trend, and have a longer stage. The second part is formed in the opposite direction. Therefore, it is customary to distinguish:

I. Impulse waves

II. Corrective waves

Based on these definitions, on the basis of these two categories of waves, trend wave models are formed, which, taking into account the principle of fractality, represent the higher order Elliott waves - longer.

Impulse waves are composed of five smaller waves and form in the direction of the main trend. At the same time, it does not matter at all what moods prevail in the market - an impulse wave can be part of both a bearish and a bullish market.

Elliott Wave Analysis in each five-wave pattern implies the presence of three impulsive waves and two corrective ones.

The corrective wave, in turn, consists of three waves, two of which are impulsive, and one is corrective. As a rule, corrective waves appear after the impulse wave has passed the full distance.

Sets of impulsive and corrective waves have the ability to form wave patterns, or figures:

• Elongation of the wave
• Double pass
• Pulse
• Zigzag
• Triangles
• Pennants
• Diagonal triangles
• Elliott wave multi-lengthening
• Wedges
• Truncation

This incomplete classification of wave patterns is complemented by separate varieties of each pattern.

Watch a video on what an Elliott Wave is and how a price movement pattern is formed. This will help you predict the movement of currency rates and increase the profitability of your trading.

In addition to the characteristics given in this section, it is necessary to note one more property of the trend waves according to the Elliott theory - they can characterize the wave analysis of the market by contraction or expansion.

Practical use of wave theory

In currency and stock trading, wave theory can be used as a basis or additional tool in the structure of a trading strategy. Most of the trading tactics using fractal principles, on which the Elliott waves are based, have excellent trade profitability indicators.

In some cases, a trader can use these Elliott waves as a prediction of the end of a trend in order to prepare for the formation of a new trend and optimize deposit management.

In other situations, wave analysis is used to recognize an already formed trend and is used to confirm the forecast and a more rational market entry.

Also, the waves can be used to determine the current state of the market at the time of the forecast.

- a graphical method of technical analysis that allows evaluating the behavior of market players based on the study of price movement waves. The basic postulates of the system were formulated in the mid-thirties of the last century.

The creator of the theory is Ralph Elliott, but the famous financier Robert Prechter made an equally significant contribution to its development and popularization.

Description of Elliott Wave Theory

The basis of Elliott's theory is the observation that each trend consists of certain base sections (waves) that are constantly repeated.

There are two types of waves on the market - impulse and correctional.

The former move in the direction of the main trend. The second, respectively, are corrections to them. The main pattern of the wave analysis consists, in fact, of one impulse and one corrective wave (1-2-3-4-5 / ABC). It, in turn, is divided into impulse and corrective waves of the lower order.

Impulse waves are designated by numbers from 1 to 5, corrective waves - by letters A, B and C. According to Elliott's theory, each trend is a combination of such “fives” and “triples”.

Any trend lasts until five waves are formed, after which it either unfolds or adjusted... V the latter case then three correction segments are formed. There are eight waves in total within such a rise-fall cycle. If there is a reversal, then we see two impulse waves formed by ten segments.

Let's break down the structure in the above screenshot. Elliott waves 1,3 and 5 are impulse... They follow a general trend. Waves 2 and 4, respectively, corrective.

In the correctional structure ABC, the situation is changing somewhat. Since this structure is part of a general downward wave (corrective), waves A and C are considered impulsive here, and wave B, directed upward, will be corrective.

The Elliott Wave Advantage

lies in the fact that such structures can be found in both upward and downward markets. In the latter case, we are talking about a mirror image of a bullish structure. That is, all impulse waves 1,3 and 5 will be downward, and 2 and 4 - upward corrections. Accordingly, in the correctional wave A and C will be upward, and B - downward.

It is important to note that the structure of the trend is independent of time scales.

Video - Elliott Waves

Elliott Wave Rules

It is not so difficult to identify five or three areas in any trend by eye. Roughly speaking, anyone who can count to ten can do this. The problem is that two traders analyzing the same chart may well come to absolutelycontrary opinions regarding its structure. To remove the subjectivity of visual assessment, the basic rules for the formation of waves were developed. Some of them were created by Elliott himself, some were later added by other theorists.

Let's start by listing the basic rules:

• The second wave of the impulse should not go down to the level of the starting point of the first wave. If this happened, then it is worth questioning the very fact of the trend development.
• The third wave of the impulse must exceed the extremum of the first. In addition, it cannot be the shortest of the three impulse when it comes to large-scale time intervals.
• The fourth wave of impulse cannot go below the extremum of the first. This rule is sometimes neglected in real market trading, but in such cases the following condition must be met.
• The fifth wave of the impulse should be above the extremum of the third.

Additional

• Corrections within a pulse should differ in complexity, nominal size, or shaping time. If there are no differences in at least one of these parameters, then the development of the trend should be questioned. There is a possibility that some complex corrective pattern is being formed at the moment.
• In an impulse structure that meets all the requirements, one of the driving waves must be stretched, that is, exceed the other two in nominal size.
• Three adjacent waves, which are part of the impulse, must be formed at different times in duration.

Based on the above rules, a trader can distinguish between impulse and corrective structures. If the wave meets all the requirements, thenit belongs to the first type. If the conditions are not fully met, this is either a correctional structure or an impulse that has not yet been formed.

• If the third wave is greater than the fifth and the first, then the latter will be approximately equal in length. This recommendation can be useful when analyzing the end of the fifth wave. Even if the fifth wave is longer than the third, and the third is longer than the first, we can still calculate the end of the fifth wave. For this we need the top of the fourth wave.
• In the process of observing the wave structures, another interesting regularity was revealed - the sizes of correctional waves 2 and 4 can be different, and they alternate from time to time. For example, if the correction in wave 2 was strong enough, then it will be insignificant in wave 4 and vice versa. Using this recommendation, you can roughly calculate the correction time in the fourth wave. If, for example, there was a significant and rapid correction in the second wave, then in the fourth it will be calmer.
• One more interesting fact... Completion of corrective wave ABC should take place at the level of wave 4 (low).

The Elliott Wave theory in practice starts with charting. To solve this problem, it is better to use indicators, some of which we will talk a little below. Experts recommend using a standard candlestick chart for analysis, as the most informative and objective. Elliott waves on the chart:

• The first step is to define significant point reversal. To do this, you can use a tool such as a signal line. From the moment of its crossing, the period begins, which we will consider.
• After the pivot point is determined, we should assign names to all waves of interest to us. This is a rather complicated process, on the correct implementation of which the quality of the subsequent analysis directly depends. It is important to remember that an assigned structural designation cannot be subsequently revised unless there are compelling reasons to do so. The choice of the time frame remains with the trader, but it is recommended to use segments no longer than thirty monowaves. Further, movement marks are placed.
• At the final stage, the wave is compacted, that is, the corresponding structural designation is assigned to it in a similar system of a larger scale. Thus, the entire chart will gradually be assembled into one of the basic Elliott patterns.

Now the trader sees the construction of the market and can predict how it will develop further.

Elliott waves in practice

The most common reason to trade the Elliott system is the presence of an impulse wave from a trend reversal point. Positions should be opened in one of the three driving sub-waves, however, one should be careful, as there is always a possibility that the chosen structure will turn out to be a component of a larger corrective pattern. After the formation of the impulse wave, it is necessary to wait for the first correction. Its completion is a signal to enter the market.

Conservative method

After the movement in the direction of the initial impulse has resumed, a signal line is drawn through the pivot point and the point of the supposed completion of the correction. A buy position is opened at the high of the first motive wave. If the price movement did not reach the order and reverses, breaking through the signal line (this happens in the case of a complex correction), you need to make sure that it does not fall below the pivot point. When the growth resumes, the line is corrected at a new low.

If the position was opened immediately, you need to continue to follow the signal line. As soon as the price drops and touches it, the trade is closed and a new order is placed at the extreme high. You should not be upset if, after touching the "signal", the price curve immediately again goes in the direction of the trend. This is a working moment, which should be treated philosophically, besides, the resulting loss can still be compensated for by a new contract.

Moderate and aggressive methods

The initial conditions for opening a position with a moderate strategy are similar to conservative trading. The difference is that the order is placed at the end point of the corrective wave B. It should always be remembered that the expected correction may be prolonged. Correction of the signal line and exit from the position is carried out according to the same principle as in the previous method. This option is recommended for novice traders.

With an aggressive strategy, an order is placed only after the signal line is broken. It is believed that the very fact of such an intersection indicates the completion of the structure and the beginning of the formation of a new model.

Elliott Wave Indicators

There is no ideal indicator for plotting Elliott waves, but a variety of modifications allows each trader to find the most suitable option for his style. Let's take a look at several popular tools.

Elliott wave oscillator

This is an indicator on the chart of which a histogram is displayed (by analogy with). The highest peaks correspond to the third driving wave of the impulse. It can be used on almost any timeframe, however, too short intervals are not recommended.

When the histogram crosses the bottom / top zero mark, a divergence is formed, indicating the completion of the next wave cycle. If at the moment of the first corrective movement the oscillator breaks zero in the opposite direction, the formation of wave 3 should be supported by another divergence. If it is absent, it can be assumed that the starting point of the model is determined incorrectly.

The fall of the histogram by 30-50% relative to the local extremum indicates the end of the third wave and the beginning of the formation of the second correctional segment. The divergence also speaks of the completion of the formation of the fifth wave - the rise / fall of the price chart is accompanied by a decrease / increase in the bars.

According to the first rule of trading, first you need to wait for the confirmation of the final crossing of the zero level. If the trend is upward, the indicator histogram is displayed above the middle level, if the downward trend is below the middle level. The position is entered after the first divergence. A rising price and a falling oscillator indicate a sell, and a reverse divergence indicates a buy. You can enter after the correctional movement goes down / up by about a third relative to the first impulse wave. Stop loss is usually placed at the extreme level and the trade is closed immediately after the formation of a new divergence.

Elliott Wave Prophet and Watl

The Wave Prophet indicator is quite popular among Elliott Wave traders. With its help, you can not only see the completed movements, but also predict the further direction of the price. The wave pattern on the chart is built automatically. If a trader thinks that the initial conditions were determined by the system erroneously, he can always set them on his own.

Watl is a convenient indicator that not only clearly displays wave patterns, but also draws trend lines. The user can see the trends of different timeframes and the forecast of the future trend. As mentioned earlier, the optimal indicator for the implementation of Elliott's theory has not yet been invented. The listed tools can be considered the most effective at the moment, but they are still far from perfect. However, this in no way diminishes their merits and benefits for traders.

Criticism of Elliott Wave Analysis

Elliott waves are often criticized. Many opponents of this method believe that there is little practical benefit from it, since it is quite subjective. Moreover, there are opinions of real practicing traders that this type of market forecasting rather contributes to the emergence of losses than profits.

What exactly do critics of wave analysis pay attention to?

First of all, they point out that price movements cannot be predicted using such a framework. The price can deviate significantly from the drawn waves. In addition, there is a subjective factor here. After all, waves, like other types of graphic patterns, can be seen literally in any formation, if desired.

Some critics note that wave analysis is a method with a lot of nuances that are not clear to most traders. For example, it is not always possible to determine in the trading process where the waves begin and where they end.

Critics also point out that best waves Elliott can only be identified on historical charts. As for working with this theory in practice, it is practically impossible due to a large number factors.

Elliott Motive and Corrective Wave Videos

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