Trading with the Elliott Wave Principle

[lasereyes]

I will be posting a guide in multiple parts of how to trade with the Elliott Waves in this thread. All of this information can be found in a book, but my goal is to distill the most important things in order to reduce the learning curb.

[lasereyes]

History

The Elliot Wave Theory is a very detailed and objective way of describing the psychology of large crowds. It was constructed by Ralph Nelson Elliot in the 1920's, but didn't see mainstream usage until the late 80's, along with various other methods of technical analysis that became popular at the time.

How it works

The Elliot Wave Theory essentially describes the patterns in which trends and counter-trends form. Trends have several different ways of forming, but the most common type of trending wave pattern is the five wave pattern composed of 3 smaller trending sub-waves and 2 small counter-trending sub-waves, which are labeled 1-5. Each trending wave is then followed by a counter-trend wave that is composed of 2 smaller trending waves and one counter-trend wave, they are labeled a-c. In combination, a complete cycle of the 5-3 pattern looks like this:

[optimistic911]

I love to understand this indicator too. I hope you post as promised. More power to your elbow!

[lasereyes]

Rules for trending waves:

1. Wave two cannot break bellow the low of wave one.
2. Wave 3 cannot be the smallest trending sub-wave.
3. Wave four must not overlap wave one.


The Three rules when broken:

[lasereyes]

Other usefull things to know about the way waves form:

Extensions

Any of the trending waves in a five wave formation can subdivide into its own clearly visible pattern. The most common wave to subdivide is the third wave, however it is also possible for the first and fifth wave to subdivide. In rare occurrences, one of the waves will extend in a way that makes it impossible to determine which of the waves is extended, we then label these types of waves with 1-9 instead of 1-5.

1st, 3rd, 5th, and undefined extensions:


Truncation

Often, in a five wave sequence, the fifth wave develops in oversold conditions, and falls slightly short of the high of the third wave. This is called truncation, and it happens much more often then you may think.

Fifth wave truncation:


Alteration

Within a 5-wave sequence, the seccond and fourth wave will almost always alternate between the two types of corrective waves, "sharp" retracements, and "flat" retracements, which will be explained in detail in a later section.

Alteration in a five wave sequence:

[optimistic911]

Other usefull things to know about the way waves form:

Extensions

Any of the trending waves in a five wave formation can subdivide into its own clearly visible pattern. The most common wave to subdivide is the third wave, however it is also possible for the first and fifth wave to subdivide. In rare occurrences, one of the waves will extend in a way that makes it impossible to determine which of the waves is extended, we then label these types of waves with 1-9 instead of 1-5.

1st, 3rd, 5th, and undefined extensions:


Truncation

Often, in a five wave sequence, the fifth wave develops in oversold conditions, and falls slightly short of the high of the third wave. This is called truncation, and it happens much more often then you may think.

Fifth wave truncation:


Alteration

Within a 5-wave sequence, the seccond and fourth wave will almost always alternate between the two types of corrective waves, "sharp" retracements, and "flat" retracements, which will be explained in detail in a later section.

Alteration in a five wave sequence:

Thanks for the postings, Can u also add pic of the chat/s as well?

[lasereyes]

Thanks for the postings, Can u also add pic of the chat/s as well?

If you mean charts, then yes, I was planning on using some examples on charts to illustrate the use of this method of trading after I finish writing the guide.

[lasereyes]

There are two other types of trending waves that are much less common:

Leading Diagonal

This type of trending wave only occurs in the position of wave 1. It is fairly uncommon.



Ending Diagonal

It occurrs in place of a fifth wave, and is somewhat common and is composed of 5 3-wave corrective patterns.

[optimistic911]

If you mean charts, then yes, I was planning on using some examples on charts to illustrate the use of this method of trading after I finish writing the guide.

Alright

[lasereyes]

There are quite a few different types of counter-trend patterns:

Zigzag

By far the most common corrective pattern, a zigzag is made of two motive waves, a and c, and one corrective wave, labeled b.

a-b-c zigzag:


Flat

A flat occurs when there is a lack of counter-trend momentum. It is composed of two 3-wave zigzags that correct each other, labeled a and b, and a single motive wave labeled c.

a-b-c flat:


Triangles

A triangle is a corrective pattern composed of 5 3 wave corrective patterns, and is very similar to an ending diagonal. The chanels can either expand or contract.

Different types of triangles: