Tag: Alternation

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Forex Elliott Wave

Alternation and Extensions in the Wave Analysis – Advanced Level

Introduction

Introduction

Introduction

In previous articles, we discussed the concepts of alternation and extensions and their importance in wave analysis.

R.N. Elliott, in his work “The Wave Principle,” described alternation as a principle of nature. Likewise, since financial markets are the result of human activity, and consequently part of nature, they are governed by the “law of nature.”

Elliott also identified the existence of extensions as part of impulsive movements. In particular, in his Treatise, Elliott points out that extensions should appear only on one of the three motive waves and never on more than one.

In this educational article, we will review and expand on the concepts of Alternation and Extensions applied in wave analysis.

Alternation

As we have seen in previous articles, alternation can be recognized in different forms, which are detailed as follows:

  1. Price, which corresponds to vertical advance, either increasing or decreasing.
  2. Time, which corresponds to the time taken by the construction of each wave.
  3. Severity, which is the ratio of the wave to the impulsive pattern, this aspect applies only to corrective waves 2 and 4.
  4. Complexity, which refers to the number of subdivisions that the Elliott pattern has in development.
  5. Construction, an Elliott wave pattern, can be a flat, zigzag, triangle, etc.

So far, we have studied the characteristics of alternation in the first three aspects. 

In impulsive structures, they can alternate in terms of time and price. However, in corrective structures, alternation in terms of price is usually not relevant. 

However, on alternation in time, in particular, one must verify the time taken by each phase of the corrective pattern, which in general will be very different from each other. Likewise, in terms of severity, if a corrective wave produces a deep retrace to the previous impulsive wave, likely, the next corrective wave will not show a deep retrace and vice versa.

The next aspect that corresponds to the alternation principle is complexity or intricacy, which refers to the number of internal subdivisions that have an Elliott wave pattern, compared to the number of subdivisions that have the adjacent structure.

In practical terms, it will be useful for the analysis of poly-waves and multi-waves. In this way, it will be helpful for one wave to be subdivided and the other not. 

The following figure shows cases for impulsive and corrective structures.

The alternation in terms of construction corresponds to the patterns that compose an impulsive or corrective structure. 

For example, in a corrective sequence in which the first movement is composed of a zigzag pattern, the next corrective move can be any structure, minus a zigzag. 

In this context, in the real market, a typical sequence is first the appearance of a zigzag and then a movement corresponding to a flat pattern, as shown in the following figure. Likewise, if the price action develops an impulsive structure, the next movement will correspond to a corrective structure of the same degree.

 

Extensions

Usually, in wave analysis, the extension and subdivision concepts tend to be used interchangeably. However, Glenn Neely, in his work “Mastering Elliott Wave,” shows that both terms are independent.

On the one hand, the extension corresponds to the wave with the longest movement in favor of the trend. As we have seen in previous articles, the extended wave appears in a single wave, and this may be in the first, third, or fifth wave, but it will never be present in more than one simultaneously.

On the other hand, the term subdivision applies to the number of segments constituting a wave, which can be impulsive or corrective.

Thus, the extended wave will not necessarily be the one with the most subdivisions. Likewise, as the complexity of the wave under study increases, the level of subdivisions that constitute it will also increase.

Finally, as indicated by R.N. Elliott in his Treatise, the extended wave is a relevant factor in terms of the behavior of an impulsive wave, either by what the most complex corrective wave will be. It can also lead the wave analyst to avoid losses and obtain gains from its knowledge.

When the first wave is extended, the structural sequence has a wedge shape. In this series of waves, the ends of waves 1 and 3 and waves 2 and 4 are joined. Usually, the fifth wave will end up under the higher guideline. The structure shall be complete when the price action violates the lower guideline joining waves 2 and 4.

When the third wave is the extended one, the fourth wave should not retrace beyond 38.2% of the third wave advance. If the retrace extends beyond 38.2%, this would be indicative of a weakness in impulsive movement, and consequently, the fifth wave should not reach a new high.

Finally, when the fifth wave is the most widespread, waves 1 and 3 may be similar, the third wave being slightly longer than the first and the fourth wave the most complex corrective wave compared to the second wave. The fifth wave will have the appearance of a false rupture of the directive that joins waves 1 and 3.

Conclusions

In this educational article, we have seen the importance of the principle of alternation in wave analysis, which can provide valuable information in the study of price action.

Also, knowledge of the alternation principle can help the wave analyst to identify which wave will be extended. In particular, when the analysts look to incorporate to the trend when it is in progress.

In the next educational article, we will study the process of wave counting and counting.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).

 

Categories
Forex Elliott Wave

Dollar Index and the Alternation Principle

In our article “Impulsive Waves Construction – Part 1,” we introduced the concept of “alternation.” In this educational article, we’ll apply this concept to the Dollar Index Analysis.
The

In our article “Impulsive Waves Construction – Part 1,” we introduced the concept of “alternation.” In this educational article, we’ll apply this concept to the Dollar Index Analysis.
The

In our article “Impulsive Waves Construction – Part 1,” we introduced the concept of “alternation.” In this educational article, we’ll apply this concept to the Dollar Index Analysis.

The Alternation Principle

Just as the Wave Principle obeys a law, alternation is also the law of nature. We can observe this law both in the universe as human activities. Just as the seasons of the year or the phases of the Moon alternate, socio-economic activities also alternate.

There is probably no other activity that has devoted as many resources to its study as financial markets. An example where we can observe the principle of alternation is in the U.S. Dollar Index.

Application in the Dollar Index

The U.S. Dollar Index (DXY), in its daily chart, illustrates the bullish sequence he developed since it found buyers on February 16, 2018, and drove to the price from 88.25 until 99.67 on October 01, 2019.

From the chart, we can observe how DXY performed the rally in two stages. In each phase, we see how the advance alternates in both price and time. In particular, the first rally was run in 180 days and advanced by about 9.9%. The second tranche lasted 376 days and increased by 6.22 percent.

Our reader can observe the same situation in the daily chart of the EURGBP cross, which was discussed in the educational article “How to analyze a fast market using the Elliott Wave Principle.”

Looking at the second chart, our reader can appreciate how price and time alternate their relationship in the EURGBP cross.

Alternation and the Analysis Process

An approach to simplify the analysis process consists of identifying different parts of the movement developed by the market and analyze it part by part. The next DXY daily chart illustrates this process.

The following 4-hour chart exposes the advance developed by the Dollar Index once it found buyers at level 88.25.

From the chart, we observe a first impulsive upward movement labeled ((i)) in black, which developed five waves of a lesser degree. Once DXY completed the first wave, the price corrected by a wave ((ii)), which is divided into three internal segments labeled as (a), (b), and (c) in blue.

Within the corrective structure, alternation over time can be distinguished. For example, the wave (a) in blue ended in 23 bars, the wave (b), in turn, was developed in 57 bars. Finally, the wave (c) took 26 bars to finish. This time difference reflects the principle of alternation in terms of simplicity and complexity of each segment that composes the price movement.

The following chart shows how the action of the price alternates in the waves (ii) and (iv) in blue. In the wave (ii), the corrective movement of DXY developed in 43 bars, while the wave (iv) was completed in only 19 bars.

Conclusions

Based on the case studied, we can recognize how the principle of alternation is reflected in the financial markets and different temporalities. This application in different time frames allows us to identify the concept of “market fractality.”

On the other hand, we can observe how the market alternates not only in a price dimension but also in time. In other words, the progress of the market must be studied concerning both price and time.

Finally, if the range of a movement is narrow and has a relatively long duration, the next move will likely be broad in terms of price motion and shorter in length.

Categories
Forex Elliott Wave

Corrective Waves Construction – Part 5

Elliott defined a complex corrective wave as the combination of two or three simple corrective structures. In this educational article, we will review the main characteristics of this group of

Elliott defined a complex corrective wave as the combination of two or three simple corrective structures. In this educational article, we will review the main characteristics of this group of

Elliott defined a complex corrective wave as the combination of two or three simple corrective structures. In this educational article, we will review the main characteristics of this group of EW formations.

The basics

Elliott named the combination of corrective waves combination as “double three” and “triple three.” These formations could present zig-zag, flat, or triangle patterns.

The price action can be characterized by a sideways movement. Each end of a simple corrective wave, as labeled by Elliott as W, Y, and Z, and each reactionary wave as X.

The following chart exposes the basic model of a double three and a triple three.


Consider that the difference between a double three and a triangle pattern is its internal structure. A triangle follows a 3-3-3-3-3 sequence. Meanwhile, in a double three, its internal wave C follows a five-wave movement.


Alternation and complexity

R.N. Elliott identified the alternation in corrective waves. If the first correction is simple, the next corrective move will be complex and vice-versa.

In the same way, a corrective wave alternates its formation. For example, consider an A-B-C sequence; if wave A starts as a zig-zag, wave B will likely be a flat pattern. Remember that wave C always runs as five waves.

The next figure shows the alternation in a corrective wave construction. This alternation is analogous if wave A is a flat pattern.


Alternation in the real market

The below chart corresponds to the NASDAQ Biotechnology Index ETF (IBB) in the 3-hour timeframe. The Elliott wave movement shows a decline started on October 01, 2018, when the price action found sellers at $122.97.


The wave A of Minor degree is composed of a corrective move developed as a zig-zag pattern ending at 100.67 on October 29, 2018. Once completed this path, IBB formed a regular flat pattern ending in early December at $111.58.

Finally, wave C of Minor degree was realized as a five waves sequence on the Christmas low at $89.64.