Trading with the Elliott Wave Principle

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.

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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.

[B]How it works[/B]

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:

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

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:

Other usefull things to know about the way waves form:


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:


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:


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?

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.

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.

Alright :cool:

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


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:


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:


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:

Now for some real life examples using AUD/USD

First, I examine a longterm chart to find out where the pair is in its supercycle:

You can see that the overall trend is upwards, it completed a five wave uptrend to just over 98 cents that included an extended 5th wave, and then “crashed” within a span of 3 months. R.N. Elliot noted that more often than not, after an impulse wave with a 5th wave extension was complete, there would be a very quick and sharp reversal close to the range of the 2nd wave, and I would think that this is the best way to explain the crash.

Now, we view the crash in greater detail, and the uptrend that resulted from it on a weekly chart. Kind of like a black-box if you will:

After the crash, you can see that the next resulting wave is clearly an impulse, with a truncated 5th wave. So naturally, what has been happening this last few months is a correction of this impulse wave.

Now we look for an entry (to go long or short, and where) on the daily chart:

You can tell by the recent flat a-b-c correction that the pair is ready to go lower. When I saw this, I entered short just shy of the closest psychological level to the 61.8% retracement of wave A, which happened to be .879. The 61.8% level is also the extension of wave a of the flat by that same ratio. So, by entering here I was able to keep draw-down to a minimum. The target profit I have set is at .731, which will be adjusted once we see the near-term cycles unfold in a smaller time frame.

The Elliot wave principle works best for positional (long-term) trading, but can be useful on lower time-frame charts, however patterns can be obscured on anything less than a 15 minute chart.

Some believe the Elliot Wave doesn’t work. Very confused as I have no
way of finding out objectively.

I am studying EW. Can someone tell me if my perception is right or wrong?

That is not how you draw the waves…

It does not follow point to point, it does not follow every HH or LL…

It has to be done in a best fit basis and then projections done from there on.

U will have two or three alternative projections, A b and maybe c. Then it becomes a method of dismissing one or the other until there is only one projection is left. Then you take a trade with a TP at the level of projection.

Its not a very precise method of trading.

Takes alot of practice. SL can be big also.

Happy Pipping.

I’d like to kind of indirectly disagree with that, I think that it is a very precise way of trading, when the market behaves in that manner, if you see a nice and tidy EW pattern, you can follow it like a dot to dot picture, however, it only appears very rarely for you be able to trade it practically.

The lesson to be learned from Elliot Wave is that the same patterns do turn up time and time again in trading, very similar, like head and shoulders, channels, double tops, etc. always subjective, never tidy, but very similar and the continuations are very similar.

Thanks for your replies guys.

I don’t need EW for trading. I am doing this for educational purpose. So those who can identify EW correctly, please let me know where i am wrong. (If possible then give me examples)


Thats more like it.

Its not a point to point wave.

The third one should be the longest of the series.

The LL and HLL or such should not overlap.

I use to subscribe to a website called ElliotWave International.

They have this down pat. You could google them and read up if you are interested to know more.

Happy Pipping.

The third one should be the longest of the series.

The 5th can be the longest one as well. According to EW rule 3rd wave can’t be the smallest so it matches the theory. I am confused about a,b,c correction. Whether it is correct or not!!!

This is wrong line 4 over laps line 1. Good thread I will be fallowing

The reason why I gave ppf as Nfx a like is that you both are right in my opinion.

You can trade it, but it is not really objective and a warranty for sure profits.

The flaw with all indicators, methods, etc is, that them are only working to a percentage level which is way below 100%. The most precisely information what we can get is price, price and price. And at least: price.

Sure, there are probabilities and that is tradable, but there is no reason why the price should follow every time a specific pattern. It’s the same as with trendlines. You can draw a trendline, the price may bounce back 5 times and the sixth time it breaks and the trendline becomes invalid, at least for this time.

My trading style is now changing rapidly to probability trading, without any indicators and not scrambling the screen with anything what is not pure price related. I mean, we can get a fancy screen with all those fibbs and trendlines and another one and hui some fancy flashing numbers …

Albeit seriously, the edge lies in a system which has most information extracted or cutted off into just probabilities. If I know my entry/exit pair of action will give me an edge, that’s all what I need.

Look how the turtles traded. They had no indicator, yet they were successful. They just counted days and that was the core of this successful system.