🌊 Origin and Development of the Theory
👨🔬 Ralph Nelson Elliott
- • 1871–1948: American accountant and theorist
- • 1934: Studied 75 years of market data while bedridden
- • Discovery: Markets follow Fibonacci sequences found in nature
- • 1938: Published “The Wave Principle”
🧬 Scientific Foundations
Natural Laws
Based on Fibonacci sequence and the Golden Ratio
Fractal Theory
Large waves contain smaller waves in recursive cycles
Crowd Psychology
Reflects cyclical changes in investor sentiment
Time Cycles
Dual forecasting power for price and time
🎯 Core Principles of Elliott Wave
🌊 Basic Wave Structure: 5–3 Pattern
Impulse Waves (5‑wave structure)
Wave 1: Initiation
- • Usually small magnitude
- • Modest volume
- • Often ignored
- • Fundamentals begin improving
Wave 2: Pullback
- • Deep retrace (50%–78.6%)
- • Contracting volume
- • Pessimism prevalent
- • Must not break Wave 1 start
Wave 3: Main Advance
- • Typically longest and strongest
- • Significant volume expansion
- • Breaks major resistance
- • Media attention rises
Wave 4: Consolidation
- • Complex sideways correction
- • Shallow retrace (23.6%–38.2%)
- • Must not break Wave 1 high
- • Prepares for Wave 5
Wave 5: Terminal Wave
- • Potential divergence
- • Volume may contract
- • Sentiment highly optimistic
- • Sets up corrective phase
Corrective Waves (3‑wave structure)
Wave A: Initial Drop
- • Relatively mild decline
- • Seen as technical correction
- • Volume begins to expand
- • Optimism lingers
Wave B: Rebound
- • Retrace of 50%–78.6%
- • Typically lighter volume
- • Often mistaken for new bull
- • Usually fails to make new highs
Wave C: Main Decline
- • Deepest and sharpest drop
- • Strong volume expansion
- • Panic spreads
- • Often breaks Wave A low
Correction Forms
- • Zigzag: 5‑3‑5 structure; sharp drop and rebound
- • Flat: 3‑3‑5 structure; sideways consolidation
- • Triangle: 3‑3‑3‑3‑3 structure; contracting ranges
- • Complex: combinations of simple corrections
⚖️ Three Cardinal Rules of Elliott Waves
Rule 1: Wave 2 must not break Wave 1 start
Meaning: A break implies incorrect labeling
Exception: Over‑shoots possible in leveraged markets
Practice: Key validation for wave effectiveness
Rule 2: Wave 3 is never the shortest
Meaning: Wave 3 is typically longest among 1/3/5
Shortest: If not longest, it still cannot be shortest
Practice: Main profit phase
Rule 3: Wave 4 must not overlap Wave 1
Meaning: Wave 4 low must not break Wave 1 high
Exception: Overlap may occur in wedges/diagonal triangles
Practice: Overlap often signals trend exhaustion
📐 Fibonacci Ratio Relationships
Price Ratio Relationships
| Wave | Common Ratios | Notes |
|---|---|---|
| Wave 2 | 50%, 61.8%, 78.6% | Retrace of Wave 1 |
| Wave 3 | 161.8%, 261.8% | Multiples of Wave 1 |
| Wave 4 | 23.6%, 38.2%, 50% | Retrace of Wave 3 |
| Wave 5 | 100%, 161.8% | Relationship to Wave 1 |
| Wave C | 100%, 161.8% | Relationship to Wave A |
Time Ratio Relationships
Cycle Relationships
Wave durations also follow Fibonacci proportions
Common Ratios
- • 61.8%: Most common time ratio
- • 100%: Equal time relationship
- • 161.8%: Extended time relationship
Practical Use
Combine price targets to forecast reversal windows
🔍 Practical Techniques for Wave Identification
📈 Identifying Impulse Waves
Shape Features
- • Wave 3 most explosive
- • Waves 1, 3, 5 move in the same direction
- • Waves 2 and 4 are corrections
- • Overall exhibits clear trend
Volume Features
- • Highest volume in Wave 3
- • Possible price‑volume divergence in Wave 5
- • Contracting volume in corrections
- • Volume expansion on breakouts
Market Sentiment
- • Wave 1: Skepticism
- • Wave 3: Confirmation
- • Wave 5: Euphoria
📉 Identifying Corrective Waves
Zigzag Correction
- • Wave A: 5‑wave structure
- • Wave B: 3‑wave structure; weak rebound
- • Wave C: 5‑wave structure; deepest decline
- • Overall sharp drop then sharp rebound
Flat Correction
- • Wave A: 3‑wave structure
- • Wave B: 3‑wave structure; stronger rebound
- • Wave C: 5‑wave structure; breaks A low
- • Overall sideways consolidation
Triangle Correction
- • Five sub‑waves; each is 3 waves
- • Range progressively contracts
- • Volume gradually shrinks
- • Often appears in Wave 4
🎯 Practical Strategies with Elliott Waves
💰 Optimal Entry and Exit
🟢 Best Entries
Wave 2 Bottom
- • Lowest‑risk entry
- • Stop below Wave 1 start
- • Target Wave 3 1.618 extension
Wave 4 Bottom
- • Enter after consolidation
- • Stop below Wave 4 low
- • Target Wave 5 completion zones
🔴 Best Exits
Wave 3 Expansion
- • Scale out at 1.618/2.618 extensions
- • Trail stops by structure
Wave 5 Divergence
- • Watch for momentum/volume divergence
- • Tighten stops and take profits