- Elliott Wave theory asserts that crowd behavior ebbs and flows in clear trends.
- Based on this ebb and flow, Elliott identified a certain structure to price movements in the financial markets.
- A basic 5-wave impulse sequence and 3-wave corrective sequence in trends are explained to find out the major trend.
- There are two types of waves: impulse and corrective.
- Impulse waves, also called motive waves, move with the bigger trend or larger degree wave.
- Corrective waves move against the larger degree wave.
- When the larger degree wave is up, advancing waves are impulsive and declining waves are corrective.
- When the larger degree wave is down, impulse waves are down and corrective waves are up.
- Elliott Wave is fractal.
- Any impulse wave subdivides into 5 smaller waves.
Any corrective wave subdivides into three smaller waves.
Rule 1: Wave 2 cannot retrace more than 100% of Wave 1.
Rule 2: Wave 3 can never be the shortest of the three impulse waves.
Rule 3: Wave 4 can never overlap Wave 1.
In contrast to rules, guidelines should hold true most of the time, not necessarily all of the time.
When Wave 3 is the longest impulse wave, Wave 5 will approximately equal Wave 1.
The forms for Wave 2 and Wave 4 will alternate. If Wave 2 is a sharp correction, Wave 4 will be a flat correction. If Wave 2 is flat, Wave 4 will be sharp.
After a 5-wave impulse advance, corrections (abc) usually end in the area of prior Wave 4 low.