Analysis and inference through the chart patterns is one of the most complex but successful strategies used by some traders. There are different trading systems that are based on the chart pattern analysis; Elliot Impulsive & Correction Waves Pattern, founded by R.N. Elliott, is perhaps the easiest among all such systems. Let us have an in-depth view of this system.
Phases
It consists of 8 waves, five of them are the impulsive waves (Bullish Phase) and three are the correction waves (Bearish Phase).
- Impulsive phase
Two of the five waves in the impulsive wave pattern are correction or bearish waves while the rest of three are bullish waves. Each of the three bullish waves in the impulsive phase is relatively stronger than the previous one i.e. the size of each bullish impulsive wave is longer than the previous wave. However, the two bearish waves in impulsive phase have almost the same size and these are around 50% or less in length as compared to bullish waves of the impulsive phase. The first phase is known as impulsive because in this phase the price gets higher and higher.
- Correction phase
The second phase of the Elliott Wave Theory is called the correction phase as it triggers the downtrend in the price. Correction phase consists of three waves; two of them are bearish while one is bullish. The bearish waves in correction phase need to be of the same size or the second wave should be larger in size as compared to the first one.
How to trade Elliott Wave Pattern?
The first and the most important thing is to recognize the pattern and it is only possible when the impulsive phase has been completed or is about to complete. Opening a short position at the peak level of fifth wave in impulsive phase can be a good decision with a target just above the beginning of bearish wave of the correction phase.
All this is obviously not possible just by analyzing the naked chart, therefore the Elliot waves theory should be considered in conjunction with other technical analysis methods such as trendline support & resistance and Fibonacci levels that may give you a good clue about possible beginning or end of various phases & waves in Elliot theory.
There are a few indicators that automatically draw the impulsive & correction waves if Elliott pattern exists, you may consider those as well.
Things to consider
There are certain things that need be considered while trading this pattern. First, look for the Elliott pattern in bigger timeframes such as H4, daily or weekly.
Second, never trade the incomplete pattern; wait until you are 100% sure about the formation of pattern. Third, even if you are sure about the pattern, avoid trade unless you find one additional confirmation through trendline support / resistance, Fibonacci levels, horizontal support / resistance levels or candlestick confirmation bars; because there is no hard and fast length of waves given by Elliott wave theory thus trade without an additional confirmation may not be successful.
