Thread by @ThePupOfWallSt

How Elliott Wave Can Improve Analysis & Timing

Elliot Wave Theory (EWT) is a form of technical analysis that traders use to analyze financial market cycles & forecast trends by identifying extremes in investor psychology and price highs & lows.

#ElliottWave

It was developed by Ralph Nelson Elliott in the 1920s. He realized that markets moved in "waves" or cycles of peaks and troughs. Elliott Wave can be very complex due to the ruleset, I plan to go over the basics in this thread.

Impulsive and Corrective Waves

These are the two types of waves. Impulses are uptrend waves. Corrective are consolidation waves. Being able to identify which wave we are in is a market edge.

Impulse waves are fractals. They will be made up of many smaller waves that trend in the same direction.

Corrective waves tend to be smaller because they are counter-trend moves and go against the main trend.

Because of this, trading in the direction of the trend tends to provide a better chance for greater profits.

Corrective waves offer opportunities to get in a trade when they are coming to an end. The idea is to catch the next impulse wave higher.

💡 When corrective waves move lower than the start of the last impulse wave, this is a signal that the uptrend may be over.

Elliott Wave Structure: 5 waves total, 3 impulse waves up, 2 corrective waves down. Waves 1,3, & 5 are impulse waves. Waves 2 & 4 are corrective.

This creates a five-wave pattern: impulse, correction, impulse, correction, and a final impulse.

Corrective waves can have a 3 wave structure, labeled A B C. A waves are down, B waves are up (counter-trend) and C waves are down to finish the correction.

There are five types of corrective patterns: (wave structure)

• Zigzag (5-3-5)
• Flat (3-3-5)
• Triangle (3-3-3-3-3)
• Double three: A combination of two corrective patterns above
• Triple three: A combination of three corrective patterns above

3 Main Elliott Wave Rules

1. Wave 3 can never be the shortest wave, but is often the longest.
2. Wave 2 can never go beyond the start of wave 1.
3. Wave 4 can never cross into the same price area as wave 1.

The Principle of Alteration

Waves 2 & 4 within an Impulsive wave will unfold in different forms: if wave 2 is a simple ABC form (zigzag), the 4th wave is likely to be a complex wave (triangle, double, triple etc.)

Relation Between Fibonacci and Elliott Wave Theory

Fibonacci is useful to measure the target of a wave’s move within the Elliott Wave structure. Different waves in an Elliott Wave structure relate to one another with the Fibonacci Ratio.

Examples:

• Wave 2 is typically 50%, 61.8%, 76.4%, or 85.4% of wave 1

• Wave 3 is typically 161.8% of wave 1

• Wave 4 is typically 14.6%, 23.6%, or 38.2% of wave 3

• Wave 5 is typically inverse 1.236 – 1.618% of wave 4, equal to wave 1 or 61.8% of wave 1+3

These are the very basics of EWT. If you wish to learn more, I suggest the following books.

Elliott Wave Principle: A Key to Market Behavior by Frost & Prechter
amzn.to/2YDYT1w

This book is a great cheat sheet for Elliott Wave Theory

Elliott Wave - Wave Pattern Cheat Sheets
amzn.to/2YKdLLx

This is a great book to study Fibonacci

Fibonacci Trading - How to Master the Time and Price Advantage by Carolyn Boroden
amzn.to/3FxR91H

You've made it to the end. 👏

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