The zigzag pattern is a three-wave structure that has a limited number of variations. In this educational post, we’ll present how to analyze the zigzag pattern under an intermediate level perspective,
The zigzag pattern is a three-wave structure that has a limited number of variations. In this educational post, we’ll present how to analyze the zigzag pattern under an intermediate level perspective,
The zigzag pattern is a three-wave structure that has a limited number of variations. In this educational post, we’ll present how to analyze the zigzag pattern under an intermediate level perspective,
The Elliott’s Zigzag Pattern
R.N. Elliott, in his work The Wave Principle, described the zigzag as a corrective formation that follows an internal sequence defined by 5-3-5.
The wave analysis analyst should consider that corrective patterns are not easy to recognize while the structure is not complete; however, it results revealing and useful to make forecasts once the formation is complete.
Zigzag Construction
Glenn Neely, in his work Mastering Elliott Wave, describes the zigzag construction as follows:
Wave A shouldn’t retrace beyond 61.8% of the impulsive wave.
Wave B should retrace at least 1% of wave A, but shouldn’t exceed 61.8% of wave A.
Wave C must finish at least slightly beyond the end of wave A.
If wave B retraces more than 61.8% of wave A, thus the movement developed doesn’t correspond to the end of wave B. In this case, the move realized correspond to a segment of a complex wave B.
The following figure illustrates the steps of the zigzag pattern construction previously described.
Types of Zigzag
According to the extension of wave C, the zigzag pattern would be classified as normal, extended, or truncated.
Normal zigzag: In this case, wave C can reach between 61.8% to 161.8% extension of wave A. Concerning wave B, this segment doesn’t retrace more than 61.8% of wave A, and wave C shouldn’t extend beyond 161.8% of wave A.
Truncated zigzag: This formation is less frequent than the other two zigzag pattern variations. Further, wave C shouldn’t be lower than 38.2% of wave A, but not greater than 61.8% of wave A.
Once wave C ends, the next path should retrace at least 81% of the entire zigzag formation. According to Neely, this pattern it is likely that appears in a triangle structure.
Extended zigzag: This variation is characterized by having a more prolonged wave C than the other two models, which surpasses the 161.8% of wave A, being similar to an impulsive sequence.
Once completed the wave C, the next path tends to retrace at least 61.8% of wave C.
Canalization Process
To canalize a zigzag formation, the wave analyst should pay attention to wave A and the end of wave B.
The canalization process begins with the trace of a base-line linking the origin of wave A with the end of wave B, then using this line, a parallel line is projected at the end of wave A.
If the wave analyst encounters a zigzag pattern, then the corrective formation could move inside the channel, violate it, but never move in a tangent way to the channel. If it occurs, then the corrective sequence may correspond to a complex correction.
Finally, once the price violates the base-line O-B, we can conclude that the zigzag pattern ended.
NASDAQ e-mini and its Zigzag Pattern
The following figure represents to NASDAQ in its 12-hour timeframe. The chart reveals the upward process that the technologic index developed in the Christmas rally of 2018 at 5,820.50 pts.
The impulsive bullish sequence completed its internal five-wave moves at 7,879.50 pts on April 24th, 2019, from where the price began to develop a corrective zigzag pattern.
As illustrated in the last figure, the wave (a) in blue looks as a five-wave structure that ended at 7,290 pts on May 13th, 2019. The second leg of the zigzag pattern advanced close to 61.8% of the wave (a), which accomplishes the requirement of zigzag construction.
The next bearish path, corresponding to wave (c) produced a second decline in five waves and dropped beyond the 61.8% and below 161.8% of (a) which lead us to conclude that the type of zigzag pattern is normal.
At the same time, we observe that the price didn’t violate the lower line of the descending channel. However, once NASDAQ soared above the upper line of the descending channel, the corrective structure ended, giving way to the next upward motive wave.
Conclusion
In this educational article, we reviewed the characteristics of the zigzag pattern and how the wave analysts can differentiate from another kind of corrective formation.
At the same time, the Fibonacci tools represent a useful way to validate what structure develops the market. In this context, this knowledge will allow the wave analyst to identify potential zones of reaction, which would enable us to incorporate into the trend.
In the next article, we will review the triangle pattern and how to recognize its variations.
Corrective waves are formations produced between two impulsive movements. In this educational article, we’ll see the standard corrective patterns defined by R.N. Elliott.
Corrective waves are formations produced between two impulsive movements. In this educational article, we’ll see the standard corrective patterns defined by R.N. Elliott.
Corrective waves are formations produced between two impulsive movements. In this educational article, we’ll see the standard corrective patterns defined by R.N. Elliott.
The Basic Structure
R.N. Elliott, in his treatise, defined corrections as a movement that develops against the trend built by motive waves.
Corrective formations characterize themselves by having three internal segments. Its analysis process tends to be more difficult than on motive waves, due to different variations that can arise while the movement is in progress.
However, the corrective structure will be clear once the formation completes its internal sequence. In this context, the wave analyst has to be patient as the price action advances.
Rules Construction
In simple words, if price action doesn’t endorse the rules of an impulsive wave, as commented in our previous articles (read more), then the market advances in a corrective structure.
The basic, or standard, corrective patterns defined by Elliott are as follows:
Flat (3-3-5)
Zigzag (5-3-5)
Triangle (3-3-3-3-3)
Similarly as the alternations on impulsive waves, corrective waves also alternate in terms of price and time.
Price: This kind of alternation applies only to the zigzag pattern. Wave A will alternate with B in terms of price; wave B will be a 61.8% or lower than the wave A length.
Time: The alternation in terms of time acquires more relevance. In particular, if the first segment elapses a specific length of time, the second leg will advance in a related 61.8% or 161.8% of the time spent by wave A.
Finally, the third segment will last similar to one of the previous sections or be 61.8 or 161.8% span of one of the two earlier waves.
Flat Pattern
The flat pattern is characterized by having an internal subdivision that follows a 3-3-5 sequence. The next figure shows its structure.
Likely, its most important characteristic is that among the standard corrective formations, this pattern has the broadest kind of variations.
The construction process and its basic rules are as follows:
Once price completes its first movement against the trend, and its form holds an internal three-segment subdivision, the recovery developed by the next sequence has to be, also formed by three internal waves that advance at least 61.8% of the first decline.
Finally, the price progression of the C wave must be over 38.2% greater than wave A.
The flat pattern has several variations defined in terms of the strength of its wave B, wave C, or both.
To understand what type of flat formation and its depth the market is developing, we should trace two parallel horizontal lines from the A wave extremes. Thus, based on the obtained evidence, we can conclude that:
If wave B moves between 61.8% and 81%, the flat pattern develops a weak wave B. In this case, the wave C should be at least 61.8% of wave B.
If wave B moves between 81% and 100%, then the flat pattern advances in a normal wave B. In this scenario, there are two options for wave C, the failure, and the extended wave C.
Finally, if wave B extends over 100% to 127.2% of the A wave, then we are in the presence of a strong wave B. In this case, waves A and C should be similar in terms of price.
The U.S. Dollar Index and its Flat Pattern
The U.S. Dollar Index (DXY), in its 2-hour chart, shows the progression that price developed in five waves from June 25th, 2019 low at 95.84.
The five-wave sequence identified in green was completed on July 09th at 97.59, from where the Greenback began to retrace in three waves. The figure reveals that after having completed the first decline identified as wave “a” in green, DXY bounced slightly over 81% of wave a, which makes us conclude that the U.S. Dollar index runs in a potential normal flat pattern.
The next decline corresponds to wave c; the figure shows that once pierced slightly below the end of wave a, the price found fresh buyers at 96.67 completing the three-wave sequence of the flat pattern.
Conclusions.
In this educational article, we review the concepts of corrective waves and its rules of construction. Similarly, we presented how corrective waves alternate in terms of price and time. These new concepts of alternation add to the definitions given in our basic level article on corrective waves.
On the other hand, we presented the flat pattern that the Dollar Index has recently developed and how this formation did not achieve the Fibonacci levels as stated by Gleen Neely in his work “Mastering Elliott Wave.”
In the next article, we will present the zigzag pattern and its analysis process.
Impulsive waves are characterized by their directionality; thus creating trends; however, how the wave analyst can recognize the stage of the trend? To answer this question, we will present the canalization process.
Impulsive waves are characterized by their directionality; thus creating trends; however, how the wave analyst can recognize the stage of the trend? To answer this question, we will present the canalization process.
Impulsive waves are characterized by their directionality; thus creating trends; however, how the wave analyst can recognize the stage of the trend? To answer this question, we will present the canalization process.
Canalization
Until now, we presented a set of rules that allow that wave analyst to identify which kind of structure the price action is creating. However, these rules do not provide any clue about its target area.
To aid in solving this question, R.N. Elliott, in his Treatise, introduced the use of channels to identify the potential target zone of the next path.
Channels are a useful tool to recognize if an impulsive sequence is complete, and to identify the potential ending points of waves in progress.
In motive waves, there exist two kinds of base-line of channels; these are base-line 0-2 and 2-4. The way to trace them is as exposes the following figure.
In the left-side figure, we observe the trace of the 0-2 line. The dotted line represents a preliminary 0-2 line that was violated by the price action. In this case, the wave analyst must update the base-line 0-2 until the confirmed end of wave 2.
Once the ending of the second wave and traced the base-line is validated, the wave analyst must project a line parallel to the 0-2 line at the end of wave 1, this channel will provide a potential target of the third wave.
Analogously, on the right-side figure, we distinguish the trace of base-line 2-4 and its projection at the end of wave 3. The channel projection will provide the potential end of the fifth wave.
The procedure for executing the canalization process is as described below.
Once the price has created the first impulse wave and, then, completed the second corrective wave, a base-line is projected linking the origin of the first impulse wave to the end of the second wave.
The base-line is then projected at the end of wave 1. This channel will provide the wave analyst with the potential target of wave 3.
When wave 3 is complete, the ends of wave 1 and 3 are joined, then a parallel line is projected towards the end of wave 2.
The projection of this channel will provide information about the possible end of wave 4.
Subsequently, once wave 4 is complete, the ends of waves 2 and 4 are joined, then the line parallel to the end of wave 3 is projected, this channel will provide the potential target of wave 5.
EURNZD – Channels Suggests a Five-Wave Sequence Completion
The following chart illustrates to EURNZD cross in its 4-hour timeframe. From the figure, we observe the rally developed by price action that began on January 24th, low at level 1.66642.
EURNZD made a first rally that boosted the price in five waves until 1.71764 level reached on last February 02nd. Once its first upward sequence has been completed, the price retraced in three waves.
The corrective process brought the price to find fresh buyers at 1.67854 on February 10th. The completion of waves (i) and (ii) allow us to trace the first channel in blue, from where the next path corresponds to wave (iii).
On the figure, we observe that the price extended its third upward sequence until 1.78755 level on March 02nd. Once this fresh higher high was reached, EURNZD started to consolidate in a fourth wave. The ending of this corrective structure drives us to trace the second upward channel in brown.
The upper-line breakout of the second ascending channel carried the EURNZD cross to complete its fifth wave that found resistance at 1.90725 level, reached on March 09th.
Once it peaked at 1.90725 level, the price action pierced the base-line of the second ascending channel, this movement could drive the cross to start a corrective sequence in the coming trading sessions.
Conclusions
In this article, we have seen how the use of channels can assist the wave analyst in the process of identifying impulse wave targets.
From the example exposed, we observed how the canalization process worked in the real market. It is essential to consider that the fifth wave can fail, and not surpass the upper-line of the ascending channel.
In this context, the wave analyst should consider the signals that can reflect the end of the five-wave sequence, for example, the base-line breakdown.
In our previous article, we covered the main rules of impulsive waves. In this educational post, we’ll present a complimentary set of rules of the impulsive waves.
In our previous article, we covered the main rules of impulsive waves. In this educational post, we’ll present a complimentary set of rules of the impulsive waves.
In our previous article, we covered the main rules of impulsive waves. In this educational post, we’ll present a complimentary set of rules of the impulsive waves.
The Alternation Rule
The alternation rule, as defined by R.N. Elliott, is not an author’s invention, alternation exists from the beginning of the universe, and this is a principle that governs nature. In the same way that the day alternates with the night, bullish market alternates with the bearish.
This rule is the foundation of wave theory; without the alternation, the wave theory would not exist. This rule states, “when two consecutive waves are compared, one must be different from the other and both must also be unique in form.
The essential element that distinguishes the alternation in the wave analysis is time. In other words, this means that if a movement on one wave occurs a reduced time span, the next move should take place in an extensive period compared with the previous move.
In wave theory, we observe the alternation in the following characteristics:
Price: it is the vertical distance that the market advances.
Time: it is the horizontal distance elapsed in the market progress.
Severity: this corresponds to the percentage that price retraces an impulsive movement.
Complexity: corresponds to the number of segments that conforms to the wave sequence.
Construction: corresponds to the type of formation that market develops, for example, flat, zigzag, triangle, etc.
The Equality Rule
The extension rule says that in an impulsive sequence, one of three motive waves must be the most extended. When the wave analyst has identified the extended wave, then, can apply the equality rule that refers to the other two waves that are as follows:1. If wave 1 is extended, then the rule applies to waves 3 and 5.
If wave 3 is extended, then the rule applies to waves 1 and 5.
If wave 5 is extended, then the rule applies to waves 1 and 3.
The equality rule establishes that two of non-extended waves tends to be equal in terms of price, time, or both.
This rule is useful, especially when the third wave is the extended wave, and the fifth fails. However, it is not helpful when the first wave is extended or is a terminal formation.
Superposition Rule
The superposition principle can be used in two different ways depending on the kind of impulsive structure; it means if the motive wave corresponds to a trend movement or a terminal sequence.
If the price action develops a trend movement, then waves two and four will never overlap. In terms of its internal sequence, the motive wave will have a 5-3-5-3-5 sequence.
If the price action follows a terminal move, then wave four will penetrate the second wave area partially. The internal subdivision of this find of waves will follow a 3-3-3-3-3 sequence.
GBPUSD Pair Follows the Elliott Wave Principle
The GBPUSD pair in its 12-hour chart illustrates the Elliott wave principle in the real market.
In the figure, we observe how the GBPUSD pair follows the Elliott wave principle. Firstly, the motive wave has five internal segments that create an upward trend; the third wave is not the shortest, and as shown in the chart, the third move corresponds to the extended wave.
Once finished the five-wave sequence, it starts a corrective move in the opposite direction of the trend following a three-wave structure, which still seems in progress.
Following the alternation rule, we observe that the first wave advanced 625 pips in 17 days, while the third jumped 817 pips in 11 days. Finally, the fifth wave ran 691 pips in 16 days. These measurements enable us to observe that the GBPUSD comply with the extension, equality, and superposition rules.
At the same time, we observe that corrective waves also alternates between themselves. The second wave retraced the movement formed by the first wave in 16 days, while the fourth wave retraced the advances of the third wave during 36 days.
Conclusion
In this article, we extended the toolbox for the wave analysis process, from where rules as the alternation, equality, and superposition, add to the seven basic rules and extension defined in our previous educational post.
In our next educational post, we will present the canalization process, which will allow the wave analyst to understand the price action from the Elliott wave perspective.
In our previous article, we presented the different standard Elliott wave formations, among which we highlight the impulsive sequence. In this educational post, we will look at the rules and principles to identify impulsive waves.
In our previous article, we presented the different standard Elliott wave formations, among which we highlight the impulsive sequence. In this educational post, we will look at the rules and principles to identify impulsive waves.
In our previous article, we presented the different standard Elliott wave formations, among which we highlight the impulsive sequence. In this educational post, we will look at the rules and principles to identify impulsive waves.
Understanding the Impulsive Waves
Impulsive waves are characterized by developing in a definite direction; this is which distinguishes a motive wave with a corrective sequence. The characteristics that must possess an impulsive structure are as follow.
It must be built by five consecutive segments that follow a structure of a trend sequence or a terminal formation.
Three of its five internal segments correspond to impulses in the same direction, which could be bullish or bearish. The other two moves will reverse one of the three impulsive segments moving in the main trend.
Once the first impulsive movement ended, the price action must develop a smaller move in the opposite direction.
The third segment moves in the same direction as the first impulsive movement. This movement cannot be of less magnitude than the first move.
At the end of the third movement, the price develops a fourth segment, which pulls back the move of the third leg. This movement must never penetrate the region of the first impulsive movement.
The fifth and last move is characterized by being longer than the fourth movement.
When measuring and comparing the extension of waves first, third, and fifth, it can be observed that not necessarily the third wave will be the largest move; however, this segment cannot be the shortest of the three impulsive movements.
If the price action does not accomplish one of these rules, the market is not moving in an impulsive sequence. Rather, it advances in a corrective structure.
The Extension Concept
The extension is the main characteristic of motive waves, and it is used to describe the largest move of an impulsive sequence.
The basic rule to classify and identify a wave as an extension states that the largest wave must surpass the next largest move, at least by 161.8%.
The Use of Labels to Identify Sequences
Until now, we have used Intermediate Wave Analysis – Motive Waves – Part 1 labels them as W1, W2, and so on, to identify each segment. From now, we will use tags as 1, 2, 3, 4, and 5, to identify each movement.
Labels are a useful tool to aid the wave analysis process. The wave analyst should consider that, in R.N. Elliott’s words, the labels are not the end of the wave analysis, it is only a tool to maintain order in the analysis process.
It should be noted that according to the labeling process described by R.N. Elliott, we will use variations to differentiate degrees, which corresponds to the timeframe that belongs to each Elliott wave structure.
Example
To comprehend the structure of an impulsive wave and the extension concept, in the following chart, we observe the GBPUSD pair in its 12-hour timeframe.
The figure shows the impulsive advance developed by the Cable when the price found buyers at 1.1958 on September 02nd, 2019. The first motive wave, identified as “1” in green, resulted in a GBPUSD advancement of 624.1 pips, rising to 1.2582.
The third wave advanced over 814 pips or 6.68%. On the chart, we observe that wave 3 in green surpasses the 161.8% of the first wave. In the same way, the fifth wave gained 691.1 pips or 5.39%, which is similar to the first wave.
Concerning corrective waves 2 and 4, we observe that the second wave is shorter than the first move, and the fourth wave does not penetrate into the first wave region, which accomplishes the rules of construction of impulsive waves.
Furthermore, we observe that the third wave advanced beyond 161.8% of wave 1; similarly, the progression of the fifth wave is slightly lower than 161.8% of the third wave.
In consequence, GBPUSD shows the progress of a bullish five-wave impulsive sequence, with Cable having developed an extended wave in the third movement of the bullish cycle. Finally, once the fifth wave reached its end and the end of the bullish cycle, a three-wave movement in the opposite direction of the previous upward sequence will occur.
Conclusion
The impulsive movement is a structure that creates trends, which follows a five-wave sequence. The knowledge of its structure allows the wave analyst to understand the degree of the advancement of the prices and, in consequence, the potential next movement of the market under study.
In the next educational article, we will unfold additional concepts to understand the nature and rules of impulsive waves.
The wave analysis consists of the market study following the principles described by R.N. Elliott in its Treatise “The Wave Principle.” In this educational article, we’ll introduce the concept of wave patterns.
The wave analysis consists of the market study following the principles described by R.N. Elliott in its Treatise “The Wave Principle.” In this educational article, we’ll introduce the concept of wave patterns.
The wave analysis consists of the market study following the principles described by R.N. Elliott in its Treatise “The Wave Principle.” In this educational article, we’ll introduce the concept of wave patterns.
Introduction
In the preliminary section, we presented the fundamentals of the wave analysis. We learned the wave concept, which will allow us to identify the segments that build a sequence of waves. Additionally, we unveiled the way to recognize the start and the end of each formation. Finally, we presented different rules to describe each kind of sequence according to which the wave analyst will get a panoramic overview of the market.
In the current section, we will present the concepts of wave analysis defined by Glenn Neely, expanding R.N. Elliott’s work.
Grouping Waves
In the preliminary wave analysis section, we presented the concept of “monowave,” or segment, that corresponds to the basic unit of a movement developed by a wave sequence. R.N. Elliott, in his work “The Wave Principle,” defined a set of patterns that follows a specific order according to its internal subdivision.
Elliott grouped these patterns into two main groups, defined as impulses and corrections. In simple words, impulses are directional movements, having five internal segments that create trends. On the other hand, corrections are non-directional movements and, also, moves against the trend; these formations present three sub-divisions.
According to the process of wave grouping, we have five basic kinds of patterns, these are:
5-5-5-5-5: Impulse.
5-3-5: Zigzag.
3-3-5: Flat.
3-3-3-3-3: Triangle.
3-3-3-3-3: Terminal.
There are, also, other complex combinations called double and triple three, that will be studied in depth in the advanced analysis wave section.
Analyzing Waves Formations
The process for an Elliott wave pattern analysis begins with the separation of formations that have 3 or 5 internal segments. The knowledge of the basic structures will allow the wave analyst to simplify the study of complex corrective patterns.
As the formations under study are recognized, the analyst should consider that the waves must have a certain level of similarity to each other, in terms of price and time. Two consecutive waves will be similar in both price and time if the smaller of the two is not less than one third (1/3) of the largest. In case the next wave is shorter, then the next wave is said to belong to a sequence of lesser degree. In other words, if W2 does not meet the price and time rule with respect to W1, then W2 must be associated with W3. After this association is made, the new segment should be called W2.
Example
The following chart illustrates Johnson & Johnson (NYSE: JNJ) in its log-scale 2-week timeframe. On the figure, when we compare wave 2 with wave 1 we observe that both comply with the similarity rule in price and time. However, wave 4 does not reach the 1/3 of time rule when compared with wave 3.
Fig 1 – Johnson & Johnson (NYSE: JNJ) 2W Log-scale. (click on it to enlarge)
Conclusions
In this article, we introduced the five basic Elliott wave patterns, which will use in the wave analysis process. Also, we presented the rule of similarity in terms of price and time between waves.
The application of these criteria and integrating the concepts of Directional and Non-Directional moves drove us to conclude that Johnson & Johnson moves in its fourth wave due that does not accomplish the 1/3 rule of minimum time compared with wave 3.
Until now, we studied different scenarios for the retracement of W2 when it is lower than 100% of W1. In this educational article, we’ll review what to expect when the retrace experienced by W2 is higher than 100% of W1.
Until now, we studied different scenarios for the retracement of W2 when it is lower than 100% of W1. In this educational article, we’ll review what to expect when the retrace experienced by W2 is higher than 100% of W1.
Until now, we studied different scenarios for the retracement of W2 when it is lower than 100% of W1. In this educational article, we’ll review what to expect when the retrace experienced by W2 is higher than 100% of W1.
The Fifth Rule
The fifth rule surges when the price runs in wave two (W2) and its progress extends between 100% and 161.8% of the first wave (W1).
In this case, could exist four possible conditions as follows.
Condition a: this condition occurs if W0 is lower than 100% of W1. As a first scenario, W1 could be part of a corrective sequence, and in consequence, W1 should identify as “:3”. In terms of the Elliott wave formations, W1 could be the first or the second segment of a corrective pattern, like a Flat pattern, a triangle formation, or the center of a Complex Correction.
A second option considers the possibility of a five-wave structure. If it occurs, W1 should label as “:5”, and the structure could correspond to the end of a zigzag pattern.
Condition b: occurs when W0 moves between 100% and 161.8% of W1. In this scenario, W1 should be part of a three-wave structure. It means that we should identify it as “:3”. In consequence, W1 could belong to the first segment of a Flat pattern, a section of a Triangle structure, or the center of a Complex correction.
Condition c: this condition occurs if W0 is between 161.8% and 261.8% of W1. In the same way that condition b, in this scenario, W1 should be part of a corrective formation as a flat (which should be an irregular flat), triangle, or complex correction.
Condition d: occurs when W0 is higher than 261.8% of W1. In this case, W1 likely will be the first part of a corrective structure; then, W1 should identify as “:3”. In terms of the Elliott wave formations, the structure in progress could correspond to a Flat pattern, a triangle, or the center of a complex correction.
The Sixth Rule
This rule will activate if wave 2 retraces between 161.8% and 261.8% of W1. The possible conditions are similar as in the fifth rule and are detailed as follows.
Condition “a”: this condition occurs if W0 is lower than 100% of W1. In this scenario, W1 could be a three-wave structure (labeled as “:3”), and W1 could correspond to a flat, triangle, or the connector of a complex correction. A second scenario considers that W1 could be a five-wave formation (identified as “:5”), then, W1 could be the end of an impulsive movement.
Condition “b”: occurs when W0 moves between 100% and 161.8% of W1. In the same way that Rule 5, condition b, the most probable formation for W1 is a three-wave structure and should identify as “:3”. W1 could be the first segment of a flat, an internal section of a triangle, or the center of a complex correction.
Condition “c”: this condition occurs if W0 is between 161.8% and 261.8% of W1. The structure that W1 develops could correspond to a corrective pattern, which should identify as “:3”, and the formation developed could be a flat pattern with failure in C or an expansive triangle.
Condition “d”: occurs when W0 is higher than 261.8% of W1. In this case, W1 could be part of a zigzag, a segment of a contractive triangle, a flat pattern with a failure in C, or the correction of an impulsive move. In any case, W1 should identify as “:3”.
The Seventh Rule
The wave analyst must use this rule when the retrace experienced by wave 2 is higher than 261.8% of wave 1. In this case, the possible conditions of W0 are similar to rules fifth and sixth, which are as follows.
Condition “a”: this condition occurs if W0 is lower than 100% of W1. In this case, W1 could be part of a three-wave structure (identified as “:3″) developing a complex correction, or a flat with a complex wave B. Another option for W1 could be a five-wave structure (labeled as”:5″) running in the failure of the fifth wave.
Condition “b”: occurs when W0 moves between 100% and 161.8% of W1. In this condition, W1 could be a three-wave structure (identified as “:3”) performing the center of a complex correction, a flat pattern, or a contractive triangle.
Condition “c”: this condition occurs if W0 is between 161.8% and 261.8% of W1. In this case, W1 could be part of a corrective formation as a continuous correction, a flat pattern, or a contractive triangle, and W1 should identify as “:3”.
Condition “d”: occurs when W0 is higher than 261.8% of W1. In this scenario, the structure suggests that W1 could be part of a corrective formation (tagged as “:3”) as a zigzag pattern, the connector of a double zigzag, the center of a complex correction (or wave-x), or a contractive triangle.
Conclusions
In this educational article, we reviewed what should be the Elliott wave structure that W1 build when W2 exceeds 100% of W1. As can be observed, in most cases, the formation developed by W1 corresponds to a corrective sequence.
According to R.N. Elliott’s words, the knowledge of the corrective formations could provide to wave analyst an edge over what should be the next move. In this context, the comprehension of different rules and conditions presented could ease and offer a relevant clue in the wave analysis to the Elliott wave trader.
In this educational article, we’ll review the fourth rule defined by Glenn Neely for the preliminary wave analysis. This rule, by its nature and context, it is likely that correspond to a corrective structure.
In this educational article, we’ll review the fourth rule defined by Glenn Neely for the preliminary wave analysis. This rule, by its nature and context, it is likely that correspond to a corrective structure.
In this educational article, we’ll review the fourth rule defined by Glenn Neely for the preliminary wave analysis. This rule, by its nature and context, it is likely that correspond to a corrective structure.
The Fourth Rule
The fourth case described by Neely considers the context when the price action developed by W2 retraces between 61.8% and 100% of W1. In the same way that the wave analyst measures the retracement developed by W1 on W0, and W2 on W1, it is necessary to evaluate the retracement of W3 on W2.
The author of “Mastering Elliott Wave” identified three possible categories of movements for wave three (W3), which are as follows.
Category “i”: will be considered if W3 is higher or equal to 100% and less than 161.8% of W3.
Category “ii”: this category occurs if W3 moves between 161.8% and 261.8% of W2.
Category “iii”: this category will occur if W3 is higher than 261.8% of W2.
The categories mentioned and their implications are detailed below.
Condition “a”: we consider this condition if W0 is lower than 38.2% of W1. For the three categories mentioned, in the most common cases, W1 could be the first segment or the center of a three-wave formation. In this context, W1 should identify as “:3”. In terms of the Elliott wave patterns, the structure could correspond to a Flat formation, the center of a triangle, or a segment of a complex corrective sequence.
In some particular cases, W1 may correspond to the end of a zigzag pattern inside of a complex correction or the end of a third wave. In this situation, W1 should identify as “:5”.
Condition “b”: will occurs if W0 is greater or equal than 38.2% and lower than 100% of W1. Depending on the extension of W3, W1 be likely the beginning or the mid-part of a corrective formation; then, W1 should identify as “:3”. In this context, W1 could be part of a flat pattern or the center of a Triangle formation.
In a particular case, W1 could be the end of a five-wave sequence; therefore, W1 must label as “:5”. If this scenario occurs, W1 could correspond to the end of a zigzag pattern.
Condition c: this condition occurs if W0 is greater or equal than 100%, and lower than 161.8% of W1. In this case, W1 belongs to a three-wave formation and should identify as “:3”. In terms of the structures defined by R.N. Elliott, the sequence in progress could correspond to a Flat pattern, a Triangle formation, or the center of a complex corrective formation, for example, a double or triple three pattern.
Condition d: this condition occurs if W0 is between 161.8% and 261.8% of W1. Similarly to condition “c,” in this case W1 should identify as “:3”. And in terms of the Elliott wave analysis, the structure in progress could be a flat, a triangle formation, or any part of a complex corrective sequence.
Condition e: will consider if W0 is higher than 261.8% of W1. In this condition occurs the same situation that conditions “c” and “d.” It means that W1 is part of a three-wave structure and should be tagged as “:3”.
According to the structures defined by the Elliott wave theory, W1 could be the first segment of a flat pattern, the center of a triangle formation, or the center of a complex corrective sequence.
Conclusions
In this article, we have seen the possible formations that could develop according to the retracements experienced by waves W0 and W2 concerning W1, and W3 compared to W2.
In terms of the patterns defined by the Elliott wave theory, the most likely formations to which W1 might belong is to a flat pattern, a central segment of a triangle structure, or the center of a complex corrective sequence.
In this educational post, we will review the third rule on the use of retracements in the wave analysis devised by Glenn Neely.
In this educational post, we will review the third rule on the use of retracements in the wave analysis devised by Glenn Neely.
In this educational post, we will review the third rule on the use of retracements in the wave analysis devised by Glenn Neely.
Third Rule
The third rule occurs when wave 2 (W2) retraces precisely 61.8% of wave 1 (W1). This scenario tends to be somewhat confusing to analyze because when the price retraces to 61.8%, there is the same likelihood that the structure in progress is an impulsive or corrective formation.
Once the retracement of W2 is compared with the height of W1, the wave analyst should evaluate the length of W0 relative to W1. From the resulting measure, several potential scenarios follow, each meeting one of the six following conditions.
Condition “a”: this condition occurs when W0 is lower than the 38.2% level of W1. In this case, W1 could be the end of a zigzag structure inside a complex corrective sequence. In this case, the end of W1 should be identified as “:5”. Another option is that W1 moves inside a continuous correction, or it is part of the first leg of a flat pattern, in this case, the end of W1 should be identified as “:3.
Condition “b”: this condition occurs if W0 is higher or equal than 38.2%, and lower than 61.8% of W1. Considering the lengths of waves “3” (W3) and “-1” (W-1), W1 could be the end of a zigzag pattern inside of a complex correction; in this case, W1 should be identified as “:5. There is another possible scenario when W1 is part of an ending pattern of an impulsive structure; for this setting, W1 should be tagged as “:3”.
Condition “c”: this condition arises when W0 is higher or equal than 61.8% and lower than 100% of W1. In this scenario, W1 could be part of a corrective structure, like a Flat or Triangle pattern. In consequence, W1 should be identified as “:3”. When the length of wave 3 (W3) is shorter than W1, W1 could be the end of a zigzag pattern, and W1 should be labeled as “:5”.
Condition “d”: this condition appears when W0 is higher or equal than 100% but lower than 161.8% of W1. Depending on the lengths of waves W2, W3, and W-1, W1 could be the first segment of a zigzag pattern. In this case, W1 will be identified as “:5”. In another instance, W1 could correspond to a section of a triangle structure or the central part of a flat pattern. If the wave analyst faces this scenario, it should identify to W1 as “:3”.
Condition “e”: This condition occurs when W0 is between 161.8% and 261.8% of W1. In the same way as with the “d” condition, W1 could correspond to the first segment of a zigzag pattern. Therefore, W1 will be identified as “:5”. The second possibility is that W1 could be the central section of a flat formation that concludes in a complex corrective pattern or a segment of a triangle formation. In this case, W1 will be tagged as “:3”.
Condition “f”: this condition occurs when W0 is higher than 261.8% of W1. In this case, it applies the same identification alternatives for W1 as a “:5” or “:3” described in the previous conditions. In other words, W1 could be part of a zigzag, flat, or triangle pattern.
Conclusions
The third rule studied in this article, reveals that this case corresponds mainly to a corrective formation. On the other hand, during the preliminary wave analysis, it is relevant to study the context in which the price action advances.
In the same way, although there are three kinds of basic corrective structures, as the price advances, the wave analyst must discard the options that couldn’t correspond to the Elliott wave formation. As said by R.N. Elliott in his work ” The Wave Principle,” the knowledge of the corrective structures provides the student an edge to visualize the potential next move of the market.
In our previous educational post, we presented the first rule defined by Gleen Neely to analyze waves. In this article, we will introduce the second rule.
In our previous educational post, we presented the first rule defined by Gleen Neely to analyze waves. In this article, we will introduce the second rule.
In our previous educational post, we presented the first rule defined by Gleen Neely to analyze waves. In this article, we will introduce the second rule.
Second Rule
The second rule defined by Neely occurs when W2 is greater or equal than 38.2%, and lower than 61.8% of W1. Once the retracement realized by W2 is measured, the length of W0 will provide five possible conditions as follows.
Condition “a”: occurs when W0 is lower than 38.2% of W1. In this case, wave W1 should be identified as “:5”. This movement could correspond to an ending sequence of a corrective structure. Another possibility for this condition is that W1 belongs to the ending move of an impulsive sequence.
Condition “b”: this condition takes place when W0 is greater or equal to 38.2%, but lower than 61.8% of W1. In this case, it is likely that W1 corresponds to a five-wave sequence and completes a corrective formation and should be tagged as “:5”. However, it is also possible that according to a specific advance of waves W2 and W3, wave 1 is a three-wave structure and should be identified as “:3”.
Condition “c”: this condition occurs when W0 moves between 61.8% and 100% of W1. In this case, W1 could correspond to the end of a flat, or zigzag pattern, and in consequence, W1 should be identified as “:5. Depending on the context of the market under study, the structure could correspond to a complex corrective sequence. On the other hand, if W0 and W2 hold some specific lengths, W1 could be a three-wave structure, and W1 should be labeled as “:3”.
Condition “d”: this condition must be considered when W0 moves between 100% and 161.8% of W1. In this case, W1 could correspond to a zigzag formation, and in consequence, W1 should be labeled as “:5”. Another scenario may consider the possibility that the structure in progress would correspond to a triangle formation. In this case, W1 should be identified as “:3”.
Condition “e”: this considers the movement of W0 beyond of 161.8% of W1. When this situation occurs, wave 1 corresponds to a five-wave structure, and in consequence, W1 should be labeled as “:5”.
Conclusions
As commented in the previous article, when the wave analysts study the market structure, each movement should not be analyzed individually, instead of this, wave analyst must study the market in a context from the previous moves, and the progress developed by market across time.
In the following educational article, we will unfold the third rule described by Glenn Neely.
In our previous educational post, we learned to identify the end of a movement. In this article, we will discuss how to use and evaluate retracements in the wave analysis.
In our previous educational post, we learned to identify the end of a movement. In this article, we will discuss how to use and evaluate retracements in the wave analysis.
In our previous educational post, we learned to identify the end of a movement. In this article, we will discuss how to use and evaluate retracements in the wave analysis.
Defining Retracement Rules
Glenn Neely, in his work “Mastering Elliott Wave,” establishes a set of rules and conditions to evaluate the retracements that each wave makes.
The first step begins with the analysis of the first movement and comparison of the retracement made in the second move (W2) with the first one (W1). Once we evaluated the retracement of W2, we need to analyze the retracement developed on the previous wave (W0) with respect to the first move.
In summary, depending on the retracement of wave 2 (W2) with respect to wave 1 (W1) and the retrace of wave zero (W0) compared to W1. Neely defined a ser of rules and conditions to evaluate and identify each movement. The set of rules will be as follows.
First Rule
We consider this rule when the second wave (W2) is lesser than 38.2% of the first wave (W1). Once we have measured the retracement made by W2, we must evaluate the previous wave (or wave W0). Under this rule, there are four possible conditions.
Condition “a”: occurs when the high of W0 is below the 61.8% level of W1. However, it is necessary to evaluate the retracement experienced by the previous wave to W0 (it is W-1). Depending on its length, W1 could be identified as “:3” or “:5”. It means that W1 could be part of a corrective or impulsive structure.
Condition “b”: this condition occurs when if W0’s high is above 61.8% but below 100% of W1. Depending on the length of W-1, W1 could correspond to an impulsive or a corrective wave; thus, W1 could be identified as “.5” or “:3.
Condition “c”: this condition occurs when W0 is above or equal to 100% of W1 level and less or equal than 161.8 of W1. In this case, we will label as “:5” the end of wave 1. However, under certain conditions, W1 could correspond to a “:3” structure.
Condition “d”: occurs when W0 is larger than 161.8% of W1. In this case, the end of W1 must be identified as “:5”. The labeling means that W1 corresponds to a five-wave sequence.
Conclusions
The evaluation of the retracements experienced by W2 and W0 could deliver insights to the wave analyst of what kind of wave is W1. However, in some cases, it is necessary to evaluate the context of more waves. This study would provide the wave analyst an overview of the Elliott wave structure that the market develops. For example, if the structure in progress corresponds to a terminal movement of a corrective sequence or an impulsive wave in development.
In the following article, we will continue discovering the rules described by Gleen Neely for the wave analysis.
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).
In our previous educational article, we learned to identify the end of the directional and non-directional movements. In this article, we will learn to recognize neutral movements.
In our previous educational article, we learned to identify the end of the directional and non-directional movements. In this article, we will learn to recognize neutral movements.
In our previous educational article, we learned to identify the end of the directional and non-directional movements. In this article, we will learn to recognize neutral movements.
The Neutral Movement
When the wave analyst faces the market in real-time, it is common to observe the price action running at a lower price/time relationship than the usual market speed. When this phenomenon occurs, we are in the presence of a neutral movement.
In particular, when the price changes its direction if the angle between the initial move and the next one is lesser than 45° thus, we are facing a neutral movement.
Depending on the kind of movement developed by segments under study, there exist two possible scenarios of a neutral move.
If the neutral movement runs in the middle of two legs that advances in the same direction, thus the end of the first path will be at the end of the neutral segment.
The second case occurs if the neutral movement advances between two segments that run in the opposite direction. In this case, the end of the first movement will be at the end of the second segment.
Neutral Movements in the US Dollar Index
The following chart shows the US Dollar Index in its 8-hour timeframe. In the figure, we observe a first neutral movement, which runs upward from 96.98 until level 97.40.
The ascending sequence makes two pauses that look horizontal. Applying the neutral movement concept, we conclude that this movement corresponds to a single path that advances into the rectangle.
In the second rectangle, we observe the decline that the Dollar Index from level 97.72 until 96.45. This bearish move exposes an acceleration that turns complex the wave analysis. In this case, the neutral movement concept helps us in determining that the bearish move corresponds to a single movement.
If the wave analyst looks for a detailed decomposition of the entire bearish segment simplified by the neutral movement, in words of R.N. Elliott, the wave analyst should have to study the move in a lower timeframe to identify every segment.
Waves Observation
Until the previous section, we observed that each movement produced is divided into two main categories depending on the segments that compound each sequence.
According to the Wave Principle, R.N. Elliott described the existence of a movement that follows a trend, and the reaction of the initial move. Elliott defined to these movements as an impulsive and corrective wave.
An impulsive wave progresses in a defined direction. Its internal sequence is formed by five segments, where three movements follow the same path, and the other two move against the main trend.
A corrective wave characterizes by its progress against the main trend direction. A corrective formation is composed of three segments.
Identifying Movements
To facilitate the wave analysis, R.N. Elliott, in his Treatise, defined the use of labels to identify the advance of the movement of each segment.
Elliott, in his work “The Wave Principle,” tells us that the use of tags to identify each movement is not an end by itself. Instead, it is a tool to ease the wave study.
The following chart represents the GBPUSD in its 4-hour range. From the figure, we observe the Cable developed a rally that advanced in five segments from level 1.19585 touched on September 03rd, 2019.
The sterling reached its highest level at 1.35149 on December 12th, 2019, from where the price action began a corrective process that still looks in progress.
Conclusions
Sometimes, the nature of the movement makes complex the waves’ observation process, and in consequence, to determine where it begins or ends.
The neutral movement concept aid the wave analyst to determine, in an objective way, where it starts or ends a move when it is not simple to define. Once the wave analyst discerns where each movement starts and finishes, the analyst will be able to advance in the wave identification process.
In our previous article about the preliminary wave analysis, we commented on the relation between price and time and distinguished the difference between directional and non-directional movement. In this educational post, we will extend new concepts to develop a wave analysis.
In our previous article about the preliminary wave analysis, we commented on the relation between price and time and distinguished the difference between directional and non-directional movement. In this educational post, we will extend new concepts to develop a wave analysis.
In our previous article about the preliminary wave analysis, we commented on the relation between price and time and distinguished the difference between directional and non-directional movement. In this educational post, we will extend new concepts to develop a wave analysis.
Finding the end of a Movement
Identifying the end of a movement is usually a tough task, especially when the wave analyst makes its first analysis.
To reduce the subjectivity in this stage, the basic rule to identify the end of a segment is: if the price action of the following section of a directional movement experiences a retrace for more than 100%, it is indicative that the movement has ended.
To illustrate this rule, let us consider the GBPNZD in its 8-hour chart. In the figure, we observe the bearish directional movement starts at 2.00187. The last directional segment that begins at 1.87283 and declines until 1.82790.
Once the price surges from the lowest level, and advances over 1.87283, reaching at 1.90588, we observe that the bearish directional movement has finished.
In the case of a non-directional movement, the segments series that conforms to the consolidation formation frequently tends to finish once the price exceeds the 161.8% level of the non-directional range.
The next chart exposes to NASDAQ e-mini futures contract in its 12-hour timeframe. The figure illustrates the non-directional movement that developed once the price reached 8,040.75 pts.
The e-mini NASDAQ futures price made a first bearish segment From 8,040-75 until 7,359.75 pts. From this low, the price action reacted, making a bounce that exceeded the 61.8% of the first bearish decline. In the same way, the third internal segment retraces more than 61.8% of the second non-directional move.
After NASDAQ surpassed 8,040.75 pts, the price continued developing a directional sequence that drove the e-mini index to reach several consecutive record highs to the date.
GBPJPY Continue Developing in a Non-Directional Move
The GBPJPY cross went bearish, starting from the 147.954 level in a five-segmented wave creating a directional sequence until 141.161. From there, the price found new buyers expecting the boost of the GBPJPY once again.
The surpassing of the previous high of segment “4” at 143.054 makes us perceive that the bearish directional movement ended with the advance of leg “6” that ended at the 144.364 level.
Once the top of segment “6” at 144.364 was reached, the price reacted bearishly, making a new decline that created a new lower low at 140.818. In view that the movement exceeded a retracement of 61.8% and was less than 161.8%, the sequence corresponds to a non-directional move.
The next movement, identified as “8”, brought the price to 144.524. This path corresponds to an additional segment of the non-directional sequence. Once that fresh high was reached, the price action reacted downward. The movement remains currently active and based on the previous analysis, the price action bias is bearish.
Conclusions
The identification of the beginning and end of each segment allows the wave analyst to reduce subjectivity in the study.
We must remark that directional and non-directional movements are not the same concepts as impulsive and corrective movements.
In the previous article, we presented the wave identification process starting with the segment as the basic unit of the price movement. In this educational article, we will introduce some rules to support the preliminary analysis.
In the previous article, we presented the wave identification process starting with the segment as the basic unit of the price movement. In this educational article, we will introduce some rules to support the preliminary analysis.
In the previous article, we presented the wave identification process starting with the segment as the basic unit of the price movement. In this educational article, we will introduce some rules to support the preliminary analysis.
Price and Time in the Waves Identification
When an Elliott wave analyst decides to study a financial asset, he tends to choose a specific timeframe, and in consequence, he will visualize a defined group of waves. However, in view that the speed of price changes across time, the analyst must be flexible in the timeframe selection process.
The psychology of masses changes over time; this phenomenon can be reflected in the speed of price, making a market more volatile in a specific moment than another. For this reason, it is useful to analyze using different timeframes.
R.N. Elliott, in his work “The Wave Principle,” exposes the importance of selecting different timeframes when the speed of price doesn’t allow us to visualize the different waves adequately.
Directional and Non-Directional Movement Concept
Before starting to analyze the price through time, it is essential to distinguish the concept of directional and non-directional movement. The directional move contains a group of segments that produces a global increase or decrease in the value of a financial asset.
When the price action runs in a directional movement, the segment that moves in the opposite direction of the previous move, never retracing beyond the 61.8% Fibonacci level of that movement.
Directional and Non-Directional Movement in GBPJPY Cross
The following chart illustrates the concept of directional and non-directional movement. The GBPJPY cross in its 2-hour chart exposes the bearish directional movement started on December 13th, 2019, when the price reached 147.954 and ended when the price found support at 141.161 on December 23rd, 2019.
The bearish directional movement ended once the segment identified as “6” surpassed the origin of the last bearish section tagged as “5”.
The sixth segment climbed until 144.364, from there, the cross found fresh sellers, which drove its price to a new low at 140.817. This non-directional movement is identified as the segment “7”.
After this new support, GBPJPY bounced in a segment identified as “8” until 144.524, being the third segment of the non-directional sequence. Currently, the price is retracing in a bearish segment that still is active.
Conclusion
The price moves following a rhythm that changes through time. Sometimes, in a different timeframe, it isn’t straightforward to visualize the Elliott wave formations, in this case, the wave analyst has to be flexible to select a different timeframe to develop its study.
The identification of directional and non-directional movements will allow the analyst to understand and follow the rhythm of the market.
The wave analysis begins with a preliminary study of the basic patterns defined by the Elliott Wave Theory. In this educational article, we will view how to start to develop a wave analysis.
The Basic Concept
Glenn Neely, in his work “Mastering Elliott Wave,” introduces the concept “monowave” to describe a basic movement that develops the price within a price chart. However, by convenience, we will use the term “segment” hereafter to identify the basic move.
Waves Identification
The first step is the chart representation on the chart with which the entire wave study will be guided for it. The simplest way is to begin through a daily timeframe.
Concerning the type of chart, this could be a bar chart or a candlestick chart. This election does not be a limitation to advance in the wave analysis. In some cases, the use of a line chart could be useful in identifying structures.
Once chosen the asset to study, we will have to identify the lowest point, and the end of the first movement once identified these movements we identify the point where the move exceeds the end of the first wave.
The following chart corresponds to Copper in its daily range.
From the figure, we distinguish each segment that Copper develops in green, the upward move, and in red the downward movement.
The bullish sequence started in early January 2019, when Copper found buyers at $2.52 per pound. The red metal ended the upward path on April 17th, 2019, at $2.99 per pound.
Alibaba Still Moves Higher
The following example corresponds to Alibaba (NYSE: BABA) in its 2-hour timeframe. The chart exposes the rally developed by the e-commerce giant since October 08th, 2019, when BABA found fresh buyers at $161.92 per share.
Once the price found support at $161.92, BABA started to move upward, building the first segment. We identified this first move as “1” labeled in blue, the section ends at $178.59 on October 17th, when the price reacted retracing the first segment. This drop is identified as “2”.
The third segment is active after the surpass of the end of the first move at $178.59. The third movement finishes at $188.17 per share. From this segment, we distinguish that the third movement is extender than the first segment. In other words, the first upward movement advanced $16.89, while the third progressed $20.10.
However, we observe that the seventh segment rallied $28.17, which is the most significant move developed by the entire bullish sequence that started on October 08th to date.
Conclusion
Wave identification is a first step that allows us to recognize the trend of each market in a specific timeframe. Due to the fractal nature of market movements, this procedure will be valid in any range of time.
The Elliott waves reflect the behavior of the masses, which characterizes by repeating itself over time. In this educational article, we will look at the basic concepts of wave analysis.
The Elliott waves reflect the behavior of the masses, which characterizes by repeating itself over time. In this educational article, we will look at the basic concepts of wave analysis.
The Elliott waves reflect the behavior of the masses, which characterizes by repeating itself over time. In this educational article, we will look at the basic concepts of wave analysis.
The Wave Concept
The first step before to start to analyze waves is to understand what a wave is? A wave is a movement that develops a market in terms of price over time. This move has its origin in the imbalance between the buying and selling forces that interact in the market.
Glenn Neely defines a “monowave” as a movement that begins with a variation in the direction of the price. This move ends when the next price variation occurs.
A monowave can have an ascending or descending diagonal direction. The speed with which it occurs in time can vary, but in no way will this be a vertical line.
The movement that develops the price through time can slow down and then gain momentum again. This variation is part of the same wave.
The Psychology of Participants
When a market moves for a large part of the time in the same direction, the interest of public participation tends to increase.
Different information media starts to pay more attention to the same time that the market movement progresses. In this stage, the general public seeks to participate and benefit from that movement. However, when it occurs, market movers tend to start to close their positioning.
R.N. Elliott, through his study, identified specific patterns that tend to repeat over time in different markets. However, these patterns do not have the same dimension; neither happens in the same way in the markets.
On the other hand, as patterns described by Elliott have specific similar characteristics. Its knowledge and identification allow making forecasts about the next movement with a high level of precision.
Types of Waves
There exist two types of basic wave movements; these are:
Impulses, that move in a defined direction. Impulsive waves characterize by composed of 5 segments, of which 3 of them move in the same direction of the trend.
Corrections move in the opposite direction of the motive movement. Generally, it tends to progress in a sideways sequence. These formations are composed of 3 segments.
Waves Identification
The market moves across time, and each movement developed can be grouped in different time ranges, from seconds to years. Elliott defined degrees and labels to ease the study of any market through time.
When a movement is grouped in a specific timeframe, each move should be considered in terms of the relationship between price and duration of itself over time, and not analyze it in absolute terms either price or time.
Once recognized, the wave to study, the next step is its identification. This stage will require the use of labels in each part of the sequence. Labels are a tool that allows distinguishing both the impulse as the correction and the degree to which it belongs each wave.
When the wave analyst carries on the labeling process, these should be used in waves of similar size and complexity. It means that waves should be identified in the same timeframe and kept proportionality between one and another measure. The labeling process will make it easier to ask where the market is going.
Another aspect to take into consideration is the complexity of waves. In other words, complex structures are the result of a combination of the combination of three or five waves; the result of this combination is the creation of a wave of a higher degree or timeframe.
The figure represents the concepts of wave (or monowave used by Glenn Neely), impulsive and corrective wave and label.
Conclusions
The study of Elliott waves lets us understand the path that a market develops. In this way, the study and the identification of patterns described by R. N. Elliott, allows the wave analyst to answer the question of where the price is and where it possibly goes with a considerably high level of precision.
Both, the use of degrees and the labels are tools that permit maintaining a logical order in the wave analysis.
Finally, when identifying wave patterns, there must be a level of proportionality in the structure being analyzed, that is, there must be consistency in terms of price ranges and time.
To think in a scientific and objective method to analyze and forecast using the Elliott Wave Theory could sound impossible. However, Glenn Neely was the first one to develop it. This educational article is the first part of a series dedicated to exposing his contribution towards the Wave Analysis.
To think in a scientific and objective method to analyze and forecast using the Elliott Wave Theory could sound impossible. However, Glenn Neely was the first one to develop it. This educational article is the first part of a series dedicated to exposing his contribution towards the Wave Analysis.
To think about a scientific and objective method to analyze and forecast using the Elliott Wave Theory could sound impossible. However, Glenn Neely was the first one to develop it. This educational article is the first part of a series dedicated to exposing his contribution towards the Wave Analysis.
The Background
The Elliott Wave Principle is part of nature and can be applied to the financial markets as a socio-economic phenomenon. The result of this application is a graphic representation of mass psychology.
The interaction of different market participants reflects prices into identifiable patterns. These patterns tend to repeat across time and allow us to foresee the most likely next movement of the market.
In financial markets, the price does not have an absolute top or bottom. The application of the Elliott Wave can help to determine the time and price where a trend could start or end. The study and analysis of specific patterns or price structures support this analysis once formation ends.
Why the Wave Theory?
The comprehension of the psychology of the masses allows the trader to participate in any financial market. For example, stock markets, commodities, currency market, among others.
Compared with traditional technical analysis, the wave theory is based on the perspective of price behavior over time, not on the identification of a specific pattern, for example, a head and shoulders pattern, double or triple top or bottom, etc.
It should be noted that the wave theory is adaptable over time. Further, although wave patterns repeat over time, there are not two markets that make the same move at the same magnitude.
Pros and Cons
Panoramic overview, Wave theory knowledge provides an overview of the market and what should be the most probable next path.
To know the psychology of masses and the wave structures allows us to understand the market expectations. Further, it will enable us to identify the phenomena as fear and euphoria.
Complexity, the wave theory is probably the most complex method of analysis in its understanding.
Flexible mentality, the wave analysis requires to detach from the mass opinion, and comprehend what stage runs the market.
Time available to study and apply this method.
Indetermination when a price structure is incomplete. However, once the wave pattern is complete, the structure and the potential next move is clear.
Conclusions
The wave theory is a complete method that can represent the psychology of masses in identifiable patterns. This method provides a comprehensive perspective of the market situation and the most likely next move.
The difficulty in the application of wave theory requires not only to learn the basic concepts. It also is fundamental to develop the capacity of abstraction to visualize the movements in progress. This capability increases across time and continuous study of different markets and conditions.
We have finished the section that covers advanced concepts of the Elliott Wave Principle. These concepts are unfolded, including the following aspects.
We have finished the section that covers advanced concepts of the Elliott Wave Principle. These concepts are unfolded, including the following aspects.
We have finished the section that covers advanced concepts of the Elliott Wave Principle. These concepts are unfolded, including the following aspects.
Forecasting with the Elliott Wave Principle. In this part, we present a way of how to realize a forecast and to set different scenarios using key concepts of the EW Principle.
Examples. In this four-part section, we apply different concepts discussed in the real market to make forecasts.
The German index DAX 30 contains the 30 biggest German public companies traded in the Deutsche Böerse. In this article, we will review what to expect from the German index for the coming weeks.
The German index DAX 30 contains the 30 biggest German public companies traded in the Deutsche Böerse. In this article, we will review what to expect from the German index for the coming weeks.
The German index DAX 30 contains the 30 biggest German public companies traded in the Deutsche Böerse. In this article, we will review what to expect from the German index for the coming weeks.
The Big Picture
DAX 30, in its two-week chart, shows the price action progress of the index from the lowest level it touched in early March 2009. Once the DAX found buyers at the 3,585.8 points, the price rallied until 13,602 points when the German index completed the wave III labeled in black.
Since the March 2009’s low, the price moved in a bullish impulsive sequence that is still incomplete. The German index has already completed three waves of Primary degree, labeled in black. Currently, the price is running in its wave IV, also labeled in black.
The First Scenario
As we discussed in a previous article, scenarios allow us to analyze the likelihood of different “what if?” viewpoints.
The first possible scenario showed on the daily chart consists if wave IV is complete with the corrective move as an (A)-(B)-(C) sequence ended at 10,279.1 points.
Thus, a first approximation to the current path could be a possible ending diagonal pattern in progress. If this scenario is valid, the DAX should be moving in a wave (3) (labeled in blue), and we must assume that this wave is incomplete.
Consequently, the next leg should have a limited decline, and bringing the way for a new bullish movement as a wave (5).
The Alternative Count
The second scenario proposes an alternative count. In this case, the daily chart shows the price action moving in an incomplete wave (B), labeled in blue.
In this context, as the wave (B) is incomplete, the price action is running in an internal leg identified as wave C labeled in green. At the same time, wave C is incomplete and should finish the waves ((iv)) and ((v)) of Minute degree labeled in black.
According to the Elliott Wave Principle, under this scenario, DAX could be developing an irregular flat formation. This structure is characterized by following an internal sequence divided into 3-3-5, and the price tends to surpass the previous relevant high, in this case, located at 13,602 points.
If this scenario is valid, the price should develop a downward wave (C), which could drive to DAX to re-test the zone of the last Christmas low at 10,279 points.
The Conclusion
Both scenarios proposed to grant us the likelihood of a marginal upside and, then, a corrective move. However, the extension of the next path will confirm the Elliott wave structure that corresponds.
Probably, DAX will extend its gains over the 14,000 points, reaching a new all-time high before starting a deeper corrective move. This movement to the upside could emerge as a three or five wave structure, depending on which scenario is right, as stated above.
The US Dollar Index (DXY) from last October shows signs of exhaustion of the bullish cycle that started in February 2016. What says us the Elliott Wave Principle about the next path of the US Dollar? In this article, we will discuss what to expect for the Greenback.
The US Dollar Index (DXY) from last October shows signs of exhaustion of the bullish cycle that started in February 2016. What says us the Elliott Wave Principle about the next path of the US Dollar? In this article, we will discuss what to expect for the Greenback.
The US Dollar Index (DXY) from last October shows signs of exhaustion of the bullish cycle that started in February 2016. What says us the Elliott Wave Principle about the next path of the US Dollar? In this article, we will discuss what to expect for the Greenback.
Fundamental Perspective
The Federal Reserve, during the last FOMC meeting, realized on December 11, decided to keep the interest rate at 1.75% by letting it unchanged for the second consecutive month.
The FED’s Chairman Jerome Powell, in his latest statement, indicated that the current monetary policy is adequate to sustain the expansion of economic activity in the United States. On the other hand, the labor market conditions remain stronger, and inflation continues in the 2% target.
In its projections for next year, the committee members do not visualize any further cut changes in the reference rate.
Technical Perspective
Dollar Index (DXY), in its weekly chart, shows the price action developing a downward corrective structure. This bearish structure began on January 03, 2017, when the DXY reached the level 103.82.
Until now, DXY has carried out two internal waves, which we identified as wave ((A)), and ((B)) labeled in black. In the weekly DXY chart, we observe that wave ((A)) progressed in five waves.
According to the Elliott Wave Principle, the formation developed by DXY should correspond to a corrective structure that presents the characteristics of a zigzag pattern. A zigzag formation is characterized by a 5-3-5 internal sequence.
The graph below shows the daily DXY chart, which reveals a bullish sequence that develops into three internal waves, labeled in blue as (A), (B), and (C), which corresponds to the complete movement of upper-degree, identified as wave ((B)).
Likewise, we recognize how the price developed a structure in the form of an ending diagonal, that in terms of the Elliott Wave Theory, appears typically in waves “5” or “C.”
On the other hand, the pierce and closing below the August 2019 low at 97.17, make us suspect that the price could be making a change from the upward cycle started in February 2018 to a downward trend.
This movement could start the third internal move of the corrective wave, which should be developed in five waves.
Our Forecast
The 4-hour chart shows DXY has completed its first bearish motive wave labeled as (1) in blue. Once its five internal segments has ended, the price bounded off from the level of 96.59 on December 12.
Short term, we expect a bullish rebound in three waves that could reach the zone between 97.94 and 98.44. From this zone, the Greenback could find sellers waiting to activate their short positions.
The long-term target is located in the zone of the 90 points as a psychological round-number level. Further, this zone is the area of the 2018’s lows. This target area coincides with the lower line of the downward channel.
The invalidation level of the bearish scenario is located at level 99.67, which corresponds to the highest level reached in early October 2019.
The NZDUSD pair has shown signs of recovery in recent weeks. Have we to think in the buy-side for the coming weeks? In this article, we will review the probable next movement from the oceanic pair.
The NZDUSD pair has shown signs of recovery in recent weeks. Have we to think in the buy-side for the coming weeks? In this article, we will review the probable next movement from the oceanic pair.
The NZDUSD pair has shown signs of recovery in recent weeks. Have we to think in the buy-side for the coming weeks? In this article, we will review the probable next movement from the oceanic pair.
Fundamental Perspective
The Reserve Bank of New Zealand (RBNZ), realized in November its last monetary policy decision, from where the policymakers kept the Official Cash Rate unchanged at 1%.
In the decision statement, Governor Adrian Orr stated that employment remains at high levels; however, inflation remains below the 2% target. Moreover, the RBNZ projections for the coming year 2020 pointed to stable interest rates at low levels so that inflation can be ensured to reach the target level.
The next meeting of the reserve will be in February 2020. As a consequence, the fundamental traders will have to closely monitor the evolution of macroeconomic data during the following two months.
Technical Perspective
From the technical point of view, the NZDUSD in its weekly chart moves sideways in a corrective process that found the first support in August 2015 at 0.61968.
During 2019, NZDUSD approached the lowest level of 2015, developing Elliott’s ending diagonal pattern, which found support at 0.62037 in early October.
According to the Elliott Wave Principle, a diagonal ending formation is an impulsive pattern that has an internal structure that is divided into 3-3-3-3-3. In turn, this formation can be found in a wave ‘5’ or ‘C’ within a corrective structure.
Once NZDUSD touched the level 0.62037, the pair found buyers and began to realize a bullish movement in three waves. The completion of this upward sequence makes us foresee the possibility of a new decline. Probably the next move will be in three waves.
Our Forecast
The NZDUSD pair in its 4-hour range shows the possibility of a corrective move to the area between 0.64647 and 0.64078. This zone could bring us the opportunity to incorporate us in the potential long-term next rally.
The invalidation level is placed at 0.62028, which corresponds to the lowest level reached by the NZDUSD in October 2019. Our long-term target is at 0.7558 level.
Finally, depending on the retracement level of the NZDUSD, the corrective sequence will reveal to us the strength or weakness for the next path.
The analysis and forecast process of any financial asset can support the decision process to take any positioning on the market. However, the time dedicated to developing it could increase the cost of the trade as this grows on time. In this educational article, we will review how to analyze and make a forecast by applying the main concepts of the Elliott Wave Principle.
The analysis and forecast process of any financial asset can support the decision process to take any positioning on the market. However, the time dedicated to developing it could increase the cost of the trade as this grows on time. In this educational article, we will review how to analyze and make a forecast by applying the main concepts of the Elliott Wave Principle.
The analysis and forecast process of any financial asset can support the decision process to take any positioning on the market. However, the time dedicated to developing it could increase the cost of the trade as this grows on time. In this educational article, we will review how to analyze and make a forecast by applying the main concepts of the Elliott Wave Principle.
The Elliott Wave Principle in a Nutshell
R.N. Elliott, in his work The Wave Principle, identified a nature’s law that governs everything, from nature to human socio-economic activities. Elliott comments that the financial markets are the most important socio-economic activity, so, when someone understands that law, he can get forecasts about the phenomena under study, the financial markets, in this case.
In this context, Elliott described that price moves in two types of movements impulses and corrections, and at the same time, the price tends to repeat some specific structures and sequences.
On the one hand, impulsive movements create trends and follow a sequence of five waves. On impulses, three waves move in the direction of the primary trend and two in the opposite direction.
On the other hand, a corrective movement consists of three waves; two of them will be in the opposite move to the main trend.
This eight-waves movement creates a cycle, and when it is complete, a new cycle of the same degree will start. In other words, when a five-waves and three-waves movement is complete, a new cycle of the same extension will take place.
Elliott gave intensive importance to corrections and told us the position of the market and the outlook. Elliott’s experience drove him to identify four main types of corrections as zigzag, flat, irregular, and triangles.
Making Simplifications
In the two latest articles, we discussed how we could simplify corrective patterns in the wave analysis using some chartist patterns as flags and triangles. Also, we commented on how it can help us in our study, reducing the time elapsed to develop a forecast and, finally, a trading plan.
The Analysis Process
The basic methodology to carry on the market analysis is to analyze from a higher to lesser time frame. In other words, we can start the study from a monthly range and finish in the hourly chart. Once we have identified the market structure, we begin to define scenarios that have a probability of occurrence. The scenarios are relevant to the analysis process because, using them, we can evaluate all possible price paths and decide which one of them is the most probable.
The Heating Oil Triangle
The following chart corresponds to Heating Oil in its weekly timeframe. In the figure, we observe the bullish sequence developed in three waves, which began on January 17, 2016, at $0.8552 per gallon. The energy commodity reached its highest level on October 03, 2018, at $2.4496 per gallon.
Once Heating Oil reached its high at $2.4496, the price started to make a bearish move, that found support at $1.6436 per gallon on January 02, 2019.
After that descent, the asset found buyers at $1.6436, Heating Oil’s traders started doing market swings. We can observe this as a triangle structure, as shown in the next daily chart.
According to the Elliott Wave Theory, we know that a triangle structure has five internal segments which follow a 3-3-3-3-3 sequence. However, there is the possibility that the triangle pattern does not build a fifth inner leg.
Now, let us identify some scenarios for the next path on Heating Oil.
Scenario 1:The price moves down and crosses the base-line of the triangle (dark orange arrow), with a first potential profit target at $1.6719, and a second target at $1.4339 per gallon.
Scenario 2 (blue arrow) considers that Heating Oil drops and, then, bounces off from the base-line, but does not surpass the previous high at $2.0994. From there, the price action begins a new bearish wave that would drive the energy commodity to $1.6719 per gallon.
Scenario 3 (black arrow), considers that the price overcomes the resistance determined by the upper-line of the triangle and the invalidation level at $2.1374.
Conclusion
As we discussed in this article, the time dedicated to analyze and forecast a financial market is a valuable resource that could increase or reduce the hidden cost of the potential trade. As occurs in mathematical models, valid simplifications can help the analyst to reduce the time to a decision process.
Flags and triangles are simple and basic formations that can ease the market study.
Finally, the formulation of different scenarios provides a wide range of options about the next potential paths of the price action. Also, these scenarios create different answers facing the question of what if the market does that?
In our previous article, we discussed how we could simplify the zigzag and flat pattern by the chartist figure known as a flag. In this educational article, we will see how triangles can be used in wave analysis.
In our previous article, we discussed how we could simplify the zigzag and flat pattern by the chartist figure known as a flag. In this educational article, we will see how triangles can be used in wave analysis.
In our previous article, we discussed how we could simplify the zigzag and flat pattern by the chartist figure known as a flag. In this educational article, we will see how triangles can be used in wave analysis.
The Background
Within the Elliott wave theory, triangles represent one of the three basic corrective formations. Similarly, in traditional technical analysis, triangles represent consolidation and continuation formations of the trend.
Elliott defined triangles as a formation that have an internal structure subdivided into five waves following a 3-3-3-3-3 sequence. At its time, Elliott identified two triangle variations, which are classified as expansive or contractive.
In general terms, triangles represent the market indecision or the balance between the buying and selling forces.
The following chart shows the model of the triangles in their contractive and expansive variants, under the Elliott Waves theory and Traditional Technical Analysis perspective.
According to the point of view of the traditional technical analysis, we can observe that the triangle pattern is not forced to have five internal segments, as in Elliott’s wave theory. In consequence, a truncated zigzag or truncated flat structure could be simplified by a triangle pattern.
The Trading Setup
The trade configuration of a contracting triangle pattern has the following characteristics:
Entry Level: A buying (or selling) position will be activated if the price exceeds and closes above the swing of the previous top.
Profit Target: The first profit target level will take place at 78.6% of the Fibonacci expansion, while the second will be at 100%, and finally, the third profit target level will be at 127.2%.
Protective Stop: The invalidation level of the trade setup will be located below the lowest swing of the triangle pattern.
The trade configuration of an expansive triangle pattern has the following properties:
Entry Level: The trade will be activated if the price exceeds the height of the expanding triangle.
Profit Target: The first profit target level will be at 100% of the Fibonacci expansion. The second profit target level will be at 127.2%.
Protective Stop: The level of invalidation will be located below the lowest low of the expansive triangle pattern.
Examples
The following chart corresponds to the AUDUSD pair in its 12-hour timeframe. We can observe that the price action developed an expanding triangle formation, which began from mid-May 2019 and culminated in mid-July 2019.
From the chart, we detect that the expanding triangle reached its highest level at 0.70821, which corresponded to a false breakout. Subsequently, the price action resolved the next movement with a drop that took it to plunge until 0.66771.
The sell-side entry was activated once the price closed below the lowest level of the expanding triangle at 0.68317. Once activated the sales position, the price reached the first target at 0.67080.
Another possibility of entry that could be considered would be the closing below the last relevant swing, that is, the closing below 0.69105. This option could provide the trader with a higher profit compared to the risk taken compared to the original entry setup.
The next example corresponds to Silver in its daily chart. From the figure, we observe that the price made a record high early July 2016, reaching $21,225 per ounce, after this, the price action performed a corrective movement, once its found support, Silver built a tight contractive triangle.
After breaking below $18,715, Silver activated a bearish scenario that drove the price to fall to the third bearish target at $15.66 per ounce.
After having fulfilled the third bearish target, the price fell and reached $18.435 on April 17, 2017, where Silver began to build a contractive triangular structure that lasted until the end of June 2018.
Once the downward break of the long-lasting triangle occurred, we see that the price made a limited downward movement, which did not yield below $14 per ounce.
Conclusion
Based on the discussion of this article, we can conclude that regardless of the corrective structures that have three or five internal waves, these can be simplified as triangular patterns. Also, we can observe that a corrective wave or a short-range narrow triangle is likely to have an extended move that, in terms of Elliott’s wave theory, could correspond to an extended wave.
On the other hand, extensive triangular formations, or of a wide range, could lead the price to move in a range not as broad as in the previous case.
Finally, in the last example, we recognize how the alternation principle works in Elliott’s wave theory. Just as the first observed triangle is simple, and has a short duration, and the second corrective formation is extensive and complex.
Is it possible to simplify the wave analysis and compare it with classic chartist patterns? Identifying Elliott Wave patterns can seem confusing, especially if you are looking to differentiate between a flat or a zigzag pattern. In this educational article, we will look at some of Elliott’s patterns and compare them to traditional chartist figures.
Is it possible to simplify the wave analysis and compare it with classic chartist patterns? Identifying Elliott Wave patterns can seem confusing, especially if you are looking to differentiate between a flat or a zigzag pattern. In this educational article, we will look at some of Elliott’s patterns and compare them to traditional chartist figures.
Is it possible to simplify the wave analysis and compare it with classic chartist patterns? Identifying Elliott Wave patterns can seem confusing, especially if you are looking to differentiate between a flat or a zigzag pattern. In this educational article, we will look at some of Elliott’s patterns and compare them to traditional chartist figures.
The Normal Zigzag, Flat and the Flag Pattern
In the Elliott wave theory, the zigzag and the flat pattern are formations built by three internal waves. At the same time, depending on the strength of the corrective move, these could be more or less profound. The following figure shows the comparison between a normal corrective wave, which can be a zigzag or flat, and the flag pattern.
If we remember the wave theory, a zigzag pattern follows a 5-3-5 sequence, and the flat structure, a 3-3-5 internal subdivision. However, both formations can be simplified as a three-legs formation. Now, as we can see in the previous figure, the normal Zigzag and Flat structures can be simplified by a flag pattern.
The flag pattern is a chartist figure that represents a pause of the market trend and usually resolves as a continuation of the previous movement. The same situation occurs with the zigzag and flat pattern.
The flag pattern is spotted by a descending (or ascending) move, which connects in a tight range, its highs, and lows within a parallel channel.
The following chart exposes a series of flag formations detected on the GBPJPY cross in its 12-hour range.
On the figure, we observe that Flag patterns are commonly found in financial markets. According to Thomas Bulkowski’s publication, the flag pattern has a break-even or failure rate below 4%, which converts it as a “pretty nice” pattern to trade.
Flag Pattern Trade Setup
The flag trade setup is similar to the zigzag of flat configuration.
Entry: The trade is triggered once the price surpasses the end of wave “B,” or the previous swing high or low.
Protective Stop: The trade will be invalid if the price drops below the low of the flag.
Target: We will determine the profit target level using the Fibonacci expansion tool. The first target will be at the 100% level, as a second target at 127.2%, and the third profit target level will place at 161.8%
Putting All-together
The following chart illustrates the GBPCHF in its 8-hour range. In early January 2019, the cross developed a rally from 1.2248, which drove to the price until 1.2573. Once reached this high, the price action formed a corrective move in three waves. The bullish position was activated once price action surpassed the previous swing at 1.2524.
After the breakout, the price rallied over the three profit targets proposed. Note how the price runs when the flag pattern is tight and high, and the difference when the flag is broad in terms of price and time.
Conclusion
From the analysis realized, we conclude that a corrective structure as a normal zigzag or flat formation can be simplified as a flag pattern. This simplification could aid the traders in reducing the time analysis elapsed to the decision process before to place an order.
The confidence level of this pattern as a continuation figure could contribute to reducing the risk in the trading process.
Exchange-Traded Funds, or better known as ETFs, are investment instruments that are traded in a centralized market. In this educational article, we will see how we can use them to
Exchange-Traded Funds, or better known as ETFs, are investment instruments that are traded in a centralized market. In this educational article, we will see how we can use them to
Exchange-Traded Funds, or better known as ETFs, are investment instruments that are traded in a centralized market. In this educational article, we will see how we can use them to create negotiating opportunities.
Exploring Markets and Diversification
In financial markets, there are virtually unlimited possibilities for investment. Decisions such as what to buy? What to sell? As well as the geographical region, level of risk, liquidity of the market or assets, expected profitability, among other aspects, are factors that an investor can face when planning his future investment.
Use of Intermarket Spreads
In simple words, a spread is a strategy on which the investor buys one market and sells another market simultaneously. For example, in the currency market, an investor could buy a contract of €100,000 and simultaneously sell a 100,000 euro on pounds sterling. In other words, this trade is equivalent to go long in the EUR/GBP spread.
Creating a Spread with ETFs
We can create different spreads according to the market in which we are interested in investing. To this end, the decision criteria will be those ETFs with higher liquidity. The following tables represent ETFs that are associated with commodities, particularly Gold and Silver.
Table 1 – ETFs Based on Gold
Table 2 – ETFs Based on Silver
From tables 1 and 2, we see that ETFs GLD and SLV record the largest size in each group. Consequently, they will be used for the construction of the GLD/SLV spread.
The GLD/SLV spread in its daily chart shows both precious metals developing a corrective structure as a B wave. Therefore, the Gold/Silver spread could see a new low. In other words, we expect a decline in GLD and an upside in SLV.
The following example shows the spread between SPY and QQQ in its daily chart. The ETF SPY is characterized by replicating the S&P 500 index, while QQQ replicates the NASDAQ 100 index.
In the spread graph SPY/QQQ, we detect that the price is developing an Ending Diagonal structure in a bearish cycle. Also, although QQQ continues to push downwards in front of the SPY, it should be noted that this pattern is an exhaustion formation. Thus, it is likely that these markets reverse soon. In this case, the positioning strategy would be a long position in SPY and another short position in QQQ.
Conclusion
After the analysis made here, you may see that everything traded, including pairs, can be considered as spread bets between an asset the underlying payment method. It is just that, considering the relative stability of fiat money it makes more sense to use the term spread when exchanging two volatile assets, as one of the main objectives of spread bets is to tame the overall market volatility since the investor is selling and buying volatility at the same time.
According to what here is exposed, the creation of spreads can help explore the strength/ weakness situation between markets. Likewise, the exercise could help to make decisions on which assets to choose. It should be emphasized that before entering a market, the spread’s price action must confirm the movement that is predicted.
Finally, this type of analysis can be extended to the futures market between futures contracts with different or similar expirations. This kind of analysis can also be applied in the stocks market, bonds, etc.
The triangle is one of the three basic corrective patterns along with the Flat structure, with more variations within Elliott’s Wave Theory. In this educational article, we will review the
The triangle is one of the three basic corrective patterns along with the Flat structure, with more variations within Elliott’s Wave Theory. In this educational article, we will review the
The triangle is one of the three basic corrective patterns along with the Flat structure, with more variations within Elliott’s Wave Theory. In this educational article, we will review the basic concepts of the triangle pattern and then apply it to the USDJPY pair.
The Fundamentals
Triangles are one of the three basic corrective formations described by R.N. Elliott. Five internal segments characterize them. The inner legs overlap and follow an internal sequence as 3-3-3-3-3.
The following figure shows the different types of triangles. By simplification, we omitted the internal structure of each segment that composes the triangle pattern.
We should consider the nature of the triangle, a balance between the buying and selling forces. In this context, and under a conservative approach to trading, it is not desirable to trade within this internal structure. However, the breakout of price action across the wave (D) can provide a reliable entry to the market with reduced risk.
The 3-Year Triangle of USDJPY
The following chart corresponds to the USDJPY pair in its weekly timeframe, using a log scale. We observe the price action on the Japanese currency developing a Contracting Triangle structure that began at the end of 2016.
The next chart shows the USDJPY moving in a 12-hour timeframe. The pair shows the last internal segment corresponding to a wave (E) of Intermediate degree labeled in black.
At the same time, in the last figure, we can distinguish the price action developing an Expanding Triangle formation in a wave C of Minor degree labeled in blue. However, the RSI oscillator reveals in its progress the shape of a contractive triangle pattern.
It should be noted that when the price action develops an Expansive Triangle in a wave C, the pattern should correspond to an Expansive Diagonal formation. Remember that a diagonal pattern has five internal waves overlapped one with another. At the same time, each inner leg holds three segments.
Trading the USDJPY Triangle
The USDJPY pair in its 12-hour chart shows an incomplete expansive diagonal. Consequently, positioning on the long-side could still have endeavored with a short-term objective placed in the upper trendline of the diagonal. A likely target area would be between 109,716 and 110,551.
Considering that the invalidation level of the bullish segment is the bottom of the wave ((iv)) in green at 108,242, the breakdown and close of the price below this level could give us the first bearish scenario with a target at the end of the wave B labeled in blue located at 106,625.
Now, if the USDJPY price continues extending its falls below the end of wave C in blue and (D) in black located at 104,446, a major-degree bearish scenario would be activated. Under this context, the pair could see the psychological support of 100 yen per dollar.
Conclusions
Depending on the trader’s style and its risk aversion, the internal structure of the triangle pattern could be traded one timeframe shorter than the time frame in which the triangle has been identified.
We must remember that the internal structure of the triangle follows a sequence 3-3-3-3-3. Under this context, a three-wave corrective structure can be a Flat pattern (which has a subdivision 3-3-5); or it can also be a zigzag pattern (5-3-5). Therefore, an internal wave C could give a trading opportunity. However, knowing the nature of the triangle pattern, and considering it is formed by the struggle between buyers and sellers, the targets of the movements anticipated should be limited by the triangle formation.
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.
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.
In our previous article, we introduced the concept of “fast market.” Also, we commented about the importance of watching the big-picture to support the market’s general overview. In this educational
In our previous article, we introduced the concept of “fast market.” Also, we commented about the importance of watching the big-picture to support the market’s general overview. In this educational
In our previous article, we introduced the concept of “fast market.” Also, we commented about the importance of watching the big-picture to support the market’s general overview. In this educational article, we’ll review the analysis of the fast movement.
Disclosing the Speed
Once the market moved following our forecast, the price action developed its next sequence in a fast way. To aid in building our analysis in the EURGBP cross, we’ll use the RSI indicator to identify each swing.
From the EURGBP hourly chart, we observe the bullish sequence started on May 05. The RSI use, allows us to identify each swing of waves 2 and 4, and divergences the end of waves 3 and 5.
Until now, the movement developed by EURGBP corresponds to a 5-3 sequence; thus, the next path should develop in five waves. In consequence, our new hypothesis could be the next move a wave three or be the second leg of a zigzag pattern.
The second EURGBP chart exposes the progress in an ending diagonal pattern. This Elliott wave formation is a motive wave built by five internal legs that overlap each other.
On the other hand, the new big-picture structure observed on the EURGBP cross unveils a 5-3-5 sequence. Thus, according to the Elliott wave principle, this formation corresponds to a zigzag pattern.
Another observation comes from the alternation between the first and second bullish leg. Both segments moved on a different relationship price and time. In other words, while the first leg ascends in a fast step, the second one progress at a slower price/time relation.
Now, from the Elliott wave principle, the next path from the EURGBP should be a corrective move in three waves. If the price breaks below the invalidation level, the correction should be more profound.
On the following chart, we observe an incomplete corrective move developed in two internal waves labeled in black. In consequence, the next movement should be a wave ((c)) in black. The completion should complete a new wave A labeled in green.
Until this moment, the price action bounced above the invalidation level, which makes us observe two things:
The EURGBP cross is running in a complex corrective structure, likely a double three pattern. This Elliott wave structure is labeled as WXY, follows a 3-3-3 sequence, and develops seven swings.
Probably according to the alternation principle, the next corrective structure could be a flat pattern.
The following chart exposes the waves A and B labeled in green completion. As can be noted, wave A holds three internal legs, wave B retraces between 81% and 100% of A. Thus, the Elliott wave structure should correspond to a regular flat pattern.
Finally, the next EURGBP chart illustrates the end of the last segment of the wave C from the regular flat pattern, which is part of a complex corrective sequence, in this case, the formation corresponds to a double three structure.
As a learned lesson, the use of the RSI indicator is useful to support the wave identification process. Similarly, to apply the Elliott Wave Principle is essential to know the basic corrective patterns to follow any market. Finally, remember that the market has only two ways to move: it moves in three or five waves.
The speed is a characteristic of nature; in the same way, some markets tend to be faster than others. The problem arises when a market moves sharply. In this educational
The speed is a characteristic of nature; in the same way, some markets tend to be faster than others. The problem arises when a market moves sharply. In this educational
The speed is a characteristic of nature; in the same way, some markets tend to be faster than others. The problem arises when a market moves sharply. In this educational article, we’ll introduce how to analyze a fast market using the Elliott Wave Principle.
Price and Speed
Both price and speed are individual characteristics of each market. Depending on specific factors, one market could be faster than another.
The problem arises when, in an active market, the price moves faster than usual. R.N. Elliott, in his Treatise “The Wave Principle,” wrote:
“In fast markets, it is essential to observe the daily as well as the weekly ranges; otherwise, characteristics of importance may be hidden.”
In other words, when the market studied in a specific timeframe doesn’t allow to identify any pattern. It is useful in these cases to observe the market in a higher time frame, for example, the daily or weekly timeframes.
The Case of Study
Consider the EURGBP cross in its 4-hour chart, which shows a rally developed from early May until the middle of August 2019. The remarkable observation is that the first part of the rally was faster than the second part of the range of study.
As a first step, let us observe the big-picture; in this case, we will study the EURGBP cross in a weekly timeframe. As can be noted, the EURGBP developed an extended Wave 3.
Both the RSI and the Awesome Oscillator display a bearish divergence, that helped us to identify waves (3) and (5).
In consequence, in view that the five-wave sequence has been completed, it is time for a corrective movement in three waves.
The next chart shows the possible recount of the EURGBP cross.
In the above figure, we observe that the cross could have fully completed a cycle that, as we know, includes a motive impulse and its corrective sequence. Thus, if our market hypothesis is that the EURGBP has completed a cycle, then our forecast should consider a new five-wave rally.
The following chart unveils the upward movement developed by the EURGBP from its bottom, established in early May.
In the next educational article, we will expand the analysis on how to decipher a fast market using the Elliott Wave Principle.
The flat pattern is a corrective formation that runs in a 3-3-5 sequence. Also, compared with other Elliott wave patterns, it has the most extensive variations. In this educational article
The flat pattern is a corrective formation that runs in a 3-3-5 sequence. Also, compared with other Elliott wave patterns, it has the most extensive variations. In this educational article
The flat pattern is a corrective formation that runs in a 3-3-5 sequence. Also, compared with other Elliott wave patterns, it has the most extensive variations. In this educational article, we will review the characteristics of the flat correction and its varieties.
The Broad Concept
The flat structure is one of the three basic corrective patterns described by R.N. Elliott in his hork “The Wave Principle.” This formation has an internal 3-3-5 sequence. The next figure illustrates the basic concept.
The main characteristic of the flat pattern is that wave B tends to extend more than 61.8% of wave A.
Even wave B can surpass 100% of wave A. Depending on its extension, wave B will be weak, regular, or strong. As a summary,
Wave B is Weak if wave B retraces between 61.8% and 81% of wave A.
Wave B is Regular if wave B retraces between 81% and 100% of wave A.
Wave B is Strong if wave B retraces more than 100% of wave A.
On the other hand, wave C must be above or equal to 38.2% of wave A. Additionally, wave C tends to variate its extension depending on the wave B strength.
Strong Flat: If wave B retraces over 100% and less than 127.2% of wave A, likely, wave C completely retraces wave B.
In case that wave B retraces more than 127.2% of wave A, it is highly probable that wave C does not retraces completely wave B.
Regular flat: It occurs when wave B retraces between 81% and 100%. In this case, it is highly likely that wave C retrace completely wave B.
Weak flat: In case that wave B retraces between 61.8% and 81% of A, it is possible that wave C retrace over 100% of wave B.
Measuring the Flat Pattern
The Gasoline daily chart illustrates a flat structure. The measuring process of wave A makes us observe that wave B retraces between 618% and 81% of wave A.
In consequence, as said previously, the corrective pattern corresponds to a weak flat structure. Thus, we should expect a wave C that retraces over 100% of wave B, as shown in the following chart.
In summary, the measuring process of wave B of a flat pattern is a useful process that could allow you to identify the potential extension of wave C.
The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this
The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this
The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this educational article, we will review how to apply the RSI with the Elliott Wave Analysis.
The basics
Possibly, the RSI indicator is the most widespread indicator from professionals to retail traders. The RSI is an oscillator that moves in a range between 0 to 100. Alexander Elder describes it as a “leading or coincident indicator – never laggard.”
Some applications of RSI are tops and bottoms identification, divergences, failure swings, support and resistance, and chart formations.
In the Elliott wave theory, the RSI application can to aid in the wave identification process. In particular, the identification of divergences is the most used application in the wave analysis.
J. W. Wilder describes the divergence between the price action and RSI path as a “powerful indication that the market could reverse soon.
A divergence takes place when the price is still increasing, while the RSI began decreasing (bearish divergence). Or when the price falls, and the RSI climbs (bullish divergence.) In the wave analysis terms, divergences appear between the end of waves three and five. Let’s see a couple of examples.
RSI and the Elliott Wave Principle
Johnson & Johnson (NYSE:JNJ), on its weekly chart, illustrates the RSI and the Awesome Oscillator. Both indicators show the divergence created between the end of waves three and five.
On the JNJ chart, we also can observe the RSI levels when price action runs in a wave three. When this occurs, the RSI tends to move between the levels 70 and 80.
In a bull market scenario, usually, the price action tends to find support near to level 40. When the price moves in a bear market, the ascending correction tends to find resistance near to level 60. This concept, with the swings identification, can support the wave analysis.
The following chart corresponds to the Dollar Index (DXY) in its 8-hour timeframe. From the figure, we observe the bullish sequence developed in five internal legs, in which we observe that each leg has three waves.
As a conclusion from the study using the RSI indicator and wave analysis, the price action unveils an ending diagonal pattern. The Elliott wave structure shows us that the Greenback should see new lower lows.
Indicators are a useful tool that can aid in supporting the analysis process. In this educational article, we will review the Awesome Oscillator and how it can help us in
Indicators are a useful tool that can aid in supporting the analysis process. In this educational article, we will review the Awesome Oscillator and how it can help us in
Indicators are a useful tool that can aid in supporting the analysis process. In this educational article, we will review the Awesome Oscillator and how it can help us in an Elliott Wave study.
The basics
The Awesome Oscillator (AO) is also known as the Elliott Wave oscillator, was developed by Bill Williams. The AO measures the immediate momentum of the five previous periods, compared with the momentum of the last 34 periods.
The calculation is based on the simple moving average of the midpoint (HL / 2) of 34 periods minus the simple moving average of the midpoint of 5 periods.
Elliott Wave and the Awesome Oscillator
The following chart corresponds to the Johnson and Johnson (NYSE:JNJ) weekly chart. The bullish motive wave started with the August 2015 low at $128.51 per share. From this low, JNJ began to a bullish sequence, which drove it to reach the $148.32 level.
From the AO oscillator, we can recognize the following elements of the price action:
Trend bias: If the trend is bullish, the AO will be positive. If it is bearish, the oscillator will move on the negative side. For our example, the market direction of the range of time studied corresponds to a bullish trend.
Wave three: We can identify wave three with the most prominent distance of the AO. From the JNJ example, we distinguish a wave (3) of Intermediate degree labeled in black. At this point, the stock reached $125.90 per share. After this peak, JNJ started a corrective sequence, and the oscillator began to decrease, even moved in the negative side.
Wave five: In the same way as the third wave, we can recognize the fifth wave watching the AO because momentum follows the dominant trend. However, in this segment, the oscillator shows a divergence between the peaks of waves three and five. In our example, JNJ ended the wave (5) on the half of January 2018 at $148.32 per share. We can observe the bearish divergence between the price and the oscillator.
Corrective waves: We can use the AO to identify corrective waves watching how it decreases against the prevailing trend. From the JNJ chart, the oscillator turns negative when the price develops a retracement.
In summary, the Awesome Oscillator can be a useful tool to complement the EW analysis, especially in wave identification. A divergence involves the exhaustion of the movement, but the price is not compelled to reverse the trend.
Intermarket Analysis studies the correlation or relationship between different markets or assets. In this educational article, we will review how to apply the correlation analysis within the Elliott Wave Principle.
Intermarket Analysis studies the correlation or relationship between different markets or assets. In this educational article, we will review how to apply the correlation analysis within the Elliott Wave Principle.
Intermarket Analysis studies the correlation or relationship between different markets or assets. In this educational article, we will review how to apply the correlation analysis within the Elliott Wave Principle.
The basics
In financial markets, we use the correlation to measure the relationship between two or more assets. These assets can be from the same or different markets.
For example, we can analyze the relationship between a commodity and a currency pair. In the first figure, we observe the relationship between Crude Oil (NYMEX:CL) and the FX pair US Dollar – Canadian Dollar (USDCAD).
From the figure, we observe that Crude Oil holds an inverse relationship with USDCAD. It means that, if CL soars, the USDCAD should decrease, and vice-versa. This type of correlation is known as negative or inverse correlation.
In the contrarian case, when an asset moves in the same direction that the second one is known as positive or direct correlation.
The second key concept in the Intermarket analysis is convergence and divergence. In the same way that we use and identify divergences, or deviations, on technical indicators, we use it with correlations. Divergences allow us to foresee the exhaustion of a sequence.
From the figure one, we identified the divergence with the red arrow. In the example, we observe at the end of a wave, when Crude Oil soars, the Loonie decreases. In general, we find divergences when the fifth wave is in progress.
Putting all together
The next chart corresponds to the NASDAQ Biotechnology ETF (IBB) and the stock price chart of MERCK & Co. (MRK), in the weekly timeframe and log scale.
In this case, both assets belong to the same sector. Thus, we expect a positive correlation with each other. From the chart, we observe that IBB and MRK started a rally in the third quarter of 2009.
MRK looks like it’s near to end the bull trend; however, IBB unveils an incomplete bullish five-waves sequence.
Finally, please, note how the divergence appears at the end of the third wave on IBB, while MRK started the wave four.
The Wave theory was discovered by Ralph Nelson Elliott during the 1930s, where he discovered that stock market movements could often be predicted
https://youtu.be/ggI4kZ2ecSo
Introduction To Elliot Wave Theory
The Wave theory was discovered by Ralph Nelson Elliott during the 1930s, where he discovered that stock market movements could often be predicted
Introduction To Elliot Wave Theory
The Wave theory was discovered by Ralph Nelson Elliott during the 1930s, where he discovered that stock market movements could often be predicted by a series of trends movements and reversals. Elliott Wave theory is, therefore, a methodology which technical traders use to identify trade entry and exits.
These movements consist of impulsive waves, followed by corrective waves. An impulsive wave is usually composed of five sub-waves (1–2–3–4–5) that moves in the same direction as the trend. A corrective wave is composed of three sub-waves (A-B-C) that moves against the trend.
Let’s turn to example A:
In this example, we can see an Elliot Wave formation. We can see that price action moves from position 0 to position 1 (an impulse wave), with I pull back from position 1 to position 2 (a corrective wave) and where this move is less than 100% of the previous upward move. We subsequently see another impulse wave higher from position 2 to position 3, with I corrective wave, or pull back, from position 3 to position 4 and where this pullback was less than 100% of the move higher from position 2 to position 3. And where this process is continued from positions 4, 5. However, from position 5 we see our pull-back to position 6, but when the subsequent impulse wave higher fails to carry on the momentum above position 5 and fades at position A. We now have scope for an A, B, C corrective move lower.
Now let’s look at example B:
In this chart example of a 4 hour moving time frame of the EUR:USD pair, we can see that on the left-hand side of the charts – where I have denoted an X – price action seems to have bottomed out and then makes a move to the upside, as denoted by the candlesticks. We then see sidewards moving price action until the market reaches point 0. We then have a move up towards the top of the previous price action period in question before moving higher again and peaking at position 1, or the beginning of our impulse move. This had previously been a period of consolidation and where traders will have been waiting to enter trades on a possible breakout from this range, either upwards or downwards.
From position 1 price pulls back, or moves lower (a corrective wave), to position 2 and then moves higher to position 3, while breaking the ceiling above position 1, which was the end of the consolidation period. This shows momentum building to the upside and a possible bull trend forming. From here, we see a further corrective wave lower to 4, followed by a continuation higher to position 5 and where this price action has formed the basis of a classic Elliot Wave movement. This bull trend will be further confirmed if price action moves higher than where it is currently situated to reach position 7 ( the continuation of a Bull trend). However, if the price action stalls, traders may see a trend reversal forming and that would be a confirmation that the wave formation is dominating this move and where price action might move from its current position on the chart at A to a fall to position B, C and lower; a corrective wave.
Traders also read these moves as being sequences of highs and lows, such as a higher highs as shown by position 3 being a higher high than position 1, and where position 5 is a higher high than position 3. They also look for higher lows, such as position 2 being a higher low than position 0. The reverse terminology is used for downward trends.
It is also important to consider that these moves are all forms of stepping stones and can be seen by other technical charts as the result of being overbought or oversold or having reached significant areas, such as key round numbers that traders typically like to trade to and from.
Always remember that technical analysis is simply that: analysis! Technical traders mostly use indicators that form after price action movements have happened, and therefore, these indicators
typically lag behind the market. And while they can be very reliable in terms of establishing trends/patterns, they can never be 100% reliable due to the myriad of permutations going on in the Forex market at any particular given time. The absolute best indicator will always be the current exchange rate, AKA, as price action.
Corrective Waves Construction. Elliott, in his Treatise, spent a large part of time describing corrective waves. In this section, we present different corrective formations.
The Elliott wave principle has its origin in the early 1930’s decade. The introduction of the wave concept was published in 1934 by R.N. Elliott in his work “The Wave
The Elliott wave principle has its origin in the early 1930’s decade. The introduction of the wave concept was published in 1934 by R.N. Elliott in his work “The Wave
The Elliott wave principle has its origin in the early 1930’s decade. The introduction of the wave concept was published in 1934 by R.N. Elliott in his work “The Wave Principle.”
The Wave Principle
In Elliott’s treatise, the author indicates that financial markets as a socio-economic activity hold a specific structure composed of five waves. In his model, Elliott teaches us that waves 1, 3, and 5, move following the direction of the dominant trend. On the contrary, waves 2 and 4 develop an opposite movement to the primary trend.
Parts of the Cycle
The Elliott wave cycle has two components; these components are an impulsive wave and a corrective wave.
As said before, an impulsive sequence holds five waves; and a corrective wave contains three segments. In consequence, a complete cycle has eight waves.
The next figure unveils a complete Elliott wave cycle.
The Analysis Process
When R.N. Elliott developed its theory, he defined a specific terminology to maintain the order in the analysis process. The author established a series of degrees that must be considered in relative terms about price and time.
The next table illustrates the different degrees defined by Elliott.
The analysis process starts with the relevant highs and lows identification in a larger timeframe. After this, we proceed to study the prices’ sequence; to aid to do this step, we examine the proportionality and the relation between price and time. The next chart illustrates the relationship between price and time.
The next stage is to identify impulsive waves. The basic guidelines of motive waves are:
It has five consecutive segments building a trend.
Three segments move in the same direction.
Wave three never is the shortest.
Wave two never ends below the origin of wave one.
When an impulsive movement finishes, it starts a corrective move of the same degree.
Alternation is a key concept of the wave principle. We observe the motive and corrective waves alternate one with another.
We observe the alternation in:
Distance.
Time.
Retracement.
Complexity.
The following EURAUD charts illustrate the concept of an alternation.
Triangles are the third fundamental Elliott wave corrective structure. In this educational article, we will review the guidelines to trade this pattern.
The basics
The triangle structure is a corrective
Triangles are the third fundamental Elliott wave corrective structure. In this educational article, we will review the guidelines to trade this pattern.
The basics
The triangle structure is a corrective
Triangles are the third fundamental Elliott wave corrective structure. In this educational article, we will review the guidelines to trade this pattern.
The basics
The triangle structure is a corrective formation with a 3-3-3-3-3 internal sequence. Triangles usually tend to appear in waves four and B.
In this formation, volume tends to decrease as the triangle progresses. Also, it characterizes by the balance between bull and bear traders.
The following figure illustrates the trading setup for a contracting triangle. The entry is triggered once the price action strikes and closes above the end of wave (D) labeled in black degree.
To place the potential targets, we can measure the Fibonacci projection from the origin of wave ((3)) or ((A)) labeled in red, and the lowest level of the triangle. The first target will be at 61.8%, and the second target at 100%.
The trading setup is invalid if the price pierces the wave (A) labeled in black degree.
Golden triangle
Gold, in its weekly chart, shows the guideline of an Elliott wave contracting triangle in progress. The bullish sequence starts on November 30, 2015, once the yellow metal found buyers at $1,046.54 per ounce.
The golden metal made the first rally until early July 2016 at $1,375.15 per ounce. After this move, Gold made an up and down sideways movement till late April 2019.
Now that we have identified the start of a price cycle, we have to face the question, “do I recognize an Elliott wave pattern?”
In this case, we start from the most straightforward formation, which could correspond to a Contracting Triangle.
Now that we have recognized a wave pattern, we advance to the second stage, which is to define our trading plan. Following the triangle setup guideline, we have to expect the breakout of wave (D) labeled in black at $1,346.75.
The theory says that the first profit target must be at 61.8% of the Fibonacci projection. However, this level is under the entry-level. In this case, we place the first profit target at the 100% level at $1,453.78. The second profit target will be at the 127.2% level at $1,543.80 per ounce.
The invalidation level is theoretically below the wave (A) labeled in the black degree at $1,122.10.
Now that we have defined the trading plan, the third stage is to manage the trade and risk. The first step is to reduce the risk. In this case, we move the protective stop from the theoretical invalidation level to the end of the wave (E) at $1,266.39, as shown in the next figure.
Once that we have reduced the risk and the trade advances, the trader must eradicate the risk. In this example, after Gold reached the first profit target at $1,453.78, we move the protective stop to the entry-level.
As an alternative to eliminate the risk, the protective stop could be placed considering the entry-level plus the trade costs, for example, commission costs and swap.
The last step of the trade management, before the trade reaches the final profit target, is to protect open profits. This last stage depends on the criteria of each trader.
The flat pattern is the second fundamental Elliott Wave corrective structure. In this educational article, we will review the guideline to trade the flat structure.
The basics
Flat pattern is
The flat pattern is the second fundamental Elliott Wave corrective structure. In this educational article, we will review the guideline to trade the flat structure.
The basics
Flat pattern is
The flat pattern is the second fundamental Elliott Wave corrective structure. In this educational article, we will review the guideline to trade the flat structure.
The basics
Flat pattern is an Elliott wave corrective structure built by three waves, and its internal sequence is 3-3-5. There exist a single model to trade a flat formation. The following chart shows the trading setup of a flat corrective structure.
From the basic model, the entry is given once price action breaks and closes above wave 4 labeled in blue, of wave (C) labeled in black. The profit target is placed in the same way as the zig-zag trade setup. It is at 100%, 127.2%, and 161.8% of the Fibonacci projection of waves ((1)) and ((2)) labeled in red. The invalidation level is under the end of the wave (C).
Trading the flat pattern
Before to define place an order, we must answer the question, “Do I see some Elliott wave pattern?”.
In the example, the IBM (NYSE:IBM) in its 8-hour chart shows a first five waves bearish sequence started on April 10, 2014. Once IBM founded buyers on January 29, 2015, at $149.52 per share, the price developed a three waves movement as a flat pattern, which ended at $176,25 on May 04, 2015.
If our hypothesis is correct, it is the Elliott wave pattern recognized is a flat structure, we can do our trading plan. The entry should be placed after the completion of the second wave (B) or (2) labeled in black degree.
The short position is triggered after the breakdown and close below the last swing at $168.75. The target is defined using the Fibonacci projection between (A) and (B) waves. In our example, IBM reached the first target at $126.53 on 100% of the Fibonacci projection.
The third part of the trade is to manage the risk of the trading plan. The first stage is to reduce the risk; for this stage, we set the invalidation level above the end of wave (B) or (2) at $176.25. Once IBM plummets, we eliminate the risk after the price drops into the 61.8% of Fibonacci projection at $145.60.
Finally, we have to protect the open profits, for example, each $5 of advance, we can move the protective stop each $5 of progress.
The zig-zag pattern is a corrective Elliott Wave structure developed by a 5-3-5 internal sequence. In this educational article, we will unfold two guidelines to trade this pattern.
Looking at
The zig-zag pattern is a corrective Elliott Wave structure developed by a 5-3-5 internal sequence. In this educational article, we will unfold two guidelines to trade this pattern.
Looking at
The zig-zag pattern is a corrective Elliott Wave structure developed by a 5-3-5 internal sequence. In this educational article, we will unfold two guidelines to trade this pattern.
Looking at the wave B
The first guideline is looking at wave B with the eyes placed in wave C progress. The following chart shows an idealization of this trading setup.
There are two different ways to set up the entry into the market. The first one is to wait for the retrace of wave (B) into the area between 38.2% and 61.5% of Fibonacci retracement. The second one settles once the price breaks and closes below wave B of wave (B). In the chart, wave B has a blue label, and wave (B) has a black degree.
The invalidation level is above wave 5, or the last swing. To set the profit target, we use the Fibonacci projection. The first target (conservative scenario) is at the 61.8% of waves (A) and (B). The second target is at 100%, and the last one is at 127.2%.
Following the trend
The second guideline is at the end of wave C. In this context; we seek to join the primary trend. The next chart explains the model for this setup.
The setup is as commented in the article “Trading the Elliott Wave Principle – Part 1.” In this case, from the previous chart, we enter the market after the breakout and close of wave 4 of wave (C).
The first profit target is at 100% of the Fibonacci projection of waves ((1)) and ((2)) labeled in red degree. Note that a conservative profit target could be at the 61.8% of the Fibonacci projection.
An alternative to placing the invalidation level is below the end of wave (C). A second option is under the origin of wave ((1)) labeled in red degree.
Trading the zig-zag pattern
The Bank of America Corp. (NYSE:BAC) 3-hour chart shows a zig-zag structure. The Elliott Wave formation started on December 31, 2014, when the price found sellers at $18.21 per share.
Sometimes, the line-chart can be helpful to unveil the internal structure. From the BAC line chart (left), we observe the 5-3-5 sequence started at the end of December 2014.
On the right side, we see the OHLC chart. In this figure, we observe the trading setup looking for trade the wave C.
From the example; the short position is active once BAC dropped and closed below $17.10.
The first profit target at $16.50 (61.8% Fib projection) is conservative. This level could allow us to move to breakeven and left the trade without risk. Finally, the BAC sell-off drove to the price to find the second target at $15.95 and the third target at $15.57.
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.
The third basic corrective formation is the triangle. This pattern follows a 3-3-3-3-3 sequence. In this educational article, we will unfold the main characteristics of this Elliott Wave pattern.
The
The third basic corrective formation is the triangle. This pattern follows a 3-3-3-3-3 sequence. In this educational article, we will unfold the main characteristics of this Elliott Wave pattern.
The
The third basic corrective formation is the triangle. This pattern follows a 3-3-3-3-3 sequence. In this educational article, we will unfold the main characteristics of this Elliott Wave pattern.
The basics
A triangle structure emerges when the two markets’ forces, buyers, and sellers, are in balance. When the triangle pattern is in progress, the volume and volatility tend to decrease over time.
The triangle pattern is the most common Elliott Wave structure. The main rule of construction is the composition of five segments, or internal waves, which are built by three waves each segment. The following chart shows the basic structure of a triangle pattern.
Triangle variations
There are four triangle variations; these are contracting, barrier, expanding, and running. The next chart exposes the different triangle variations.
A triangle pattern tends to appear before the end of a trend. For this reason, it is useful the study in recognition of this Elliott Wave structure.
The triangle pattern in action
The example corresponds to the weekly chart of Nikkei 225 futures (CME:NKD) in log scale. The Japanese index shows a motive wave of Cycle degree in progress. The bullish sequence started in March 2009, when the market found buyers at 6,950 pts.
Pay attention to the extension of the third wave of Cycle degree, which climbed over 16,000 pts. At the same time, the third wave of Primary degree soared 12,740 pts (154.42%).
From the chart, we observe two triangles formations. The first one is a barrier triangle and was developed on wave 3 of Primary degree. The Elliott Wave structure started in the second half of May 2013 and ended in the first half of October 2014.
The second one is an expanding triangle in progress. The EW structure belongs to the fourth wave of Cycle degree. Currently develops the segment C-D. Consider the possibility that the price action could not reach the previous high of 2018 at 24,515 pts.
For the current sequence, the most likely path is a marginal upside, giving way to a bearish move probably to the 18,000 pts. Once completed this corrective move, Nikkei should start a rally with the eyes placed at the 26,000 pts.
The second basic corrective formation is the Flat Pattern. Although this structure has three waves, it is different from the zig-zag. In this article, we will describe the structure of
The second basic corrective formation is the Flat Pattern. Although this structure has three waves, it is different from the zig-zag. In this article, we will describe the structure of
The second basic corrective formation is the Flat Pattern. Although this structure has three waves, it is different from the zig-zag. In this article, we will describe the structure of the Flats.
The basics
A Flat structure is an irregular corrective formation that contains three segments and built by a 3-3-5 sequence. If the price action breaks a motive wave rule, and the structure does not correspond to a zig-zag pattern, we are likely facing a 3-3-5 formation.
In a flat pattern tends to retrace less of the last impulsive move. Also, this corrective formation tends to occur after a strong trend; it means when the major trend is strong. In the following figure, we observe the basic structure of the flat formation.
Flat pattern variations
There are three types of Flat patterns: regular, expanded, and running flat. In a regular flat correction, wave B moves between the 2/3 and 100% of wave A, and wave C could travel from the 100% to 1/3 beyond of wave A.
In an Expanded Flat, wave B moves over the origin of wave A, and wave C extends ahead of wave A.
The Running flat structure, unlike the Extended Flat, characterizes by the extension of wave C, which ends before the end of wave A.
In the next diagram, we can appreciate the different flat formations.
Channeling in flat formations
A useful tool to identify a flat pattern is the channel. The channeling process allows us to visualize the potential next movement of the market.
The channeling process starts by tracing a horizontal line from the origin of wave A. Once completed; it must project the base-line at the end of wave A.
The next figure shows the different variations of the flat pattern.
The flat pattern in action
The e-mini SP 500 future (CME:ES) on its daily chart shows a sell-off started on October 03, 2018, when the price reached at 2,944.75 pts. The first decline was developed in three waves. As says the canalization process for this structure, we trace a horizontal channel from the origin to the end of wave A.
After this movement, ES made a sideways move in another three waves. Finally, the e-mini began a second bearish leg developed in five internal waves until 2,316.75.
R.N. Elliott, in his work “The Wave Principle” described the zig-zag structure as a corrective pattern. In this educational article, we will unfold the zig-zag formation.
The basics
The zig-zag
R.N. Elliott, in his work “The Wave Principle” described the zig-zag structure as a corrective pattern. In this educational article, we will unfold the zig-zag formation.
The basics
The zig-zag
R.N. Elliott, in his work “The Wave Principle” described the zig-zag structure as a corrective pattern. In this educational article, we will unfold the zig-zag formation.
The basics
The zig-zag pattern contains three waves in a higher degree, and follow a 5-3-5 sequence in its lower degree. This order means that the first leg (A) has five internal waves; the wave (B) has three segments. Finally, wave (C) is formed by five waves. The following picture shows the formation of a zig-zag pattern.
Zig-zag variations
A zig-zag pattern could develop some variations as a normal, truncated, and extended. The following chart represents the different variations of the zig-zag structure.
Consider as a key to classify what kind of zig-zag structure is running, each segment of the corrective wave must follow the 5-3-5- sequence, and the extension of wave C.
Zig-zag patterns: Channeling
Another tool to identify the type of zig-zag pattern is the use of channels. Channeling allows us to identify the potential movement of a zig-zag formation.
Channeling is developed in the same way as motive waves. In this case, we must connect the end of the last motive wave with the end of wave B and project the parallel line at the end of wave A.
In the next figure, we observe the difference between a normal and a truncated zig-zag not necessarily surpass the base-line of the channel. The main difference is that in a normal zig-zag, the wave C projection could be at least 2/3 of wave A.
In the truncated zig-zag, the wave C projection is between 1/3 and less than 2/3 of wave A.
On the extended zig-zag pattern case; the sequence could be indicative of a complex corrective sequence formation.
The S&P 500 weekly chart shows a zig-zag pattern. The bearish sequence started in October 2007 when the price reached at 1,576.1 pts. The corrective move ended on March 2009 at 666.8 pts. In some cases, the line chart could be helpful to visualize each segment of a wave. In this example, we observe in the line chart how the structure accomplishes the 5-3-5 sequence.
Corrections are formations that occur after each impulse. As we have seen before, corrective waves have three segments. In this article, we will see the main characteristics of the corrective
Corrections are formations that occur after each impulse. As we have seen before, corrective waves have three segments. In this article, we will see the main characteristics of the corrective
Corrections are formations that occur after each impulse. As we have seen before, corrective waves have three segments. In this article, we will see the main characteristics of the corrective waves.
Nature of the corrective waves
Generally, corrective waves are more challenging to identify than impulsive waves due to their variations. Elliott spent a large part of his time describing the different types of corrections. The author, in his Treatise, explains that “a corrective wave in progress is complicated to predict accurately between its pattern and extent.
Corrections are characterized by having three waves, except triangles that have five internal segments. Some factors that can influence the form of correction are time, speed, the extent of the previous movement, etc.
In the following figure, we observe the formation of the basic corrective structures.
Corrective waves formation
If the price action does not allow all the rules of formation of an impulsive wave to be verified, then the market is developing a corrective structure.
The most straightforward corrective structures are:
– Zig-zag, this formation has a 5-3-5 sequence.
– Flat, whose internal structure has a 3-3-5 configuration.
– Triangles, these formations develop in a sequence 3-3-3-3-3.
There are also corrective structures that are a combination of two or three simple corrective patterns. These formations are known as double three and triple three.
Alternation in the corrective waves
Just as impulsive waves alternate, corrective waves do too. In simple terms, Elliott points out that if wave two is a simple structure, wave four will be complex and vice versa. In the following figure, we observe how the corrective waves alternate in complexity.
Corrective waves can also alternate in the strength level. That is, a correction can be ordinary or strong. In the following chart, we observe the ideal model of the strength level in a corrective structure.
Wave five is the last movement in the direction of the trend. In this educational article, we will review two ways to trade the fifth wave.
Trend following
The first
Wave five is the last movement in the direction of the trend. In this educational article, we will review two ways to trade the fifth wave.
Trend following
The first
Wave five is the last movement in the direction of the trend. In this educational article, we will review two ways to trade the fifth wave.
Trend following
The first choice to trade the fifth wave is looking to join the primary trend. The following chart shows the trading setup.
There are two ways to place the order. The first option is following the retracement of a wave 4, which could extend from the Fibonacci levels 23.6% to 50%. The second option is to wait for the breakout and close above wave B of wave four.
For the invalidation level placement, we have to remember the Elliott Wave rule “wave four never end in the territory of wave one.”
To define the profit target levels, we use the Fibonacci projection from waves 3 and 4. In this case, the first target will be at 61.8%, the second at 78.6%, and the third target at 100%.
In some cases, if wave three is the extended wave, there is the possibility that wave five has the same extension that wave one.
Ending diagonal pattern
The second alternative to trade the fifth wave is when the price action builds an Ending diagonal pattern. In this case, we have two options to enter the market. The first one is to place the order after the breakdown of the lower trendline. The second one is after the close under the swing of wave 4.
The invalidation level is above the wave 5, and the profit target is at the end of wave 2.
The fifth wave in the real market
The next chart corresponds to PayPal Holdings (NYSE:PYPL) in its 8-hour timeframe. PYPL developed a rally from the Christmas 2018 low at $76.70 per share.
From the bullish cycle, we observe the wave three and the retracement developed by wave 4. PYPL retraced until the Fibonacci level 38.2%. In this sense, we can look for long positions from 23.6% until 50% of the Fibonacci retracement.
The price action drove to PYPL until 61.8% of the Fibonacci projection at $121.48 on July 16, 2019. As can be noted, PayPal Holdings started to decline once it reached the highest level of the year.
The invalidation level could be placed on two different levels. The first one is at the end of wave one at $94.59. The second alternative is at the 61.8% of the Fibonacci retracement at $97.34 per share.
The next weekly chart corresponds to the e-mini NASDAQ futures (CME:NQ). In this example, we observe an ending diagonal structure.
The sell position could be placed in two different ways, after the lower trendline, or once the price closes below the end of wave 4. Finally, NQ dropped until the bearish target at the end of wave 2 at 1,457.75 pts.
A diagonal is an impulsive pattern, but it is not an impulse. That is because Diagonals have the characteristics of corrective waves. In this article, we will explain the aspects
A diagonal is an impulsive pattern, but it is not an impulse. That is because Diagonals have the characteristics of corrective waves. In this article, we will explain the aspects
A diagonal is an impulsive pattern, but it is not an impulse. That is because Diagonals have the characteristics of corrective waves. In this article, we will explain the aspects of the diagonal formations.
Diagonal Pattern Structure
Diagonal patterns share rules of both impulsive and corrective waves. Even when, as a motive wave, wave 3 is never the shortest, in the diagonal pattern, wave 4 can enter the territory of wave 1. There are two main types of diagonals, leading diagonal and ending diagonal. The following figure shows these two cases.
Ending diagonal
This impulsive pattern develops mainly in a fifth wave, especially when the market has made a significant advance in time. The internal structure corresponds to a 3-3-3-3-3 sequence. In this formation, wave 1 and 4 may or may not overlap. However, this is not an exclusive requirement. It has also been observed that internal wave 3 is the most extended.
The following example corresponds to the mini NASDAQ index (NQ) futures on the weekly timeframe and semilog scale. The bullish motive sequence began in September 2002 until the end of October 2007. In the figure, we observe the progress made by the price over the upper line of the diagonal. Once the price surpassed it, NQ started a corrective movement that ended in October 2009.
Leading diagonal
This type of impulsive wave can appear in both a wave 1 and an A wave. Its internal structure can be 5-3-5-3-5 or 3-3-3-3-5. In the main diagonal, wave 1 and 4 can overlap. However, this is not a mandatory requirement. Also, there is a possibility that the diagonal formation is expansive rather than contractive.
In some cases, in the ending diagonal pattern, we can observe the truncation of wave five. The following Dollar Index (DXY) weekly chart shows a leading diagonal and an ending diagonal from where wave 5 is truncated.
Leonardo da Pisa developed the Fibonacci sequence in the thirteen century. The series starts like this: 1-1-2-3-5-8, and so on. Elliott, in his work “Nature’s Law,” said Fibonacci provides
Leonardo da Pisa developed the Fibonacci sequence in the thirteen century. The series starts like this: 1-1-2-3-5-8, and so on. Elliott, in his work “Nature’s Law,” said Fibonacci provides
Leonardo da Pisa developed the Fibonacci sequence in the thirteen century. The series starts like this: 1-1-2-3-5-8, and so on. Elliott, in his work “Nature’s Law,” said Fibonacci provides the mathematical basis of the Wave Principle. In this educational article, we will review how to apply the Fibonacci sequence to the Elliott Wave Theory.
The Fibonacci ratios
The Fibonacci sequence has its origin in Leonardo da Pisa’s work, “Liber Abacci.” In his work, the mathematician responses to the question:
How many pairs of rabbits placed in an enclosed area can be produced in a single year from one pair of rabbits if each pair gives birth to a new pair each month starting with the second month?
The answer to this question resulted in the series calculated as follows: The first month, there will be zero plus one that results in one pair. The next month, the rabbits will reproduce, expanding to two pairs. In short, the sequence of rabbits is as follows, 0, 1, 1, 2, 3, 5. The series concludes that at the end of the year, there will be 144 pairs of rabbits.
From the Fibonacci series, we obtain the main ratios of this sequence; these are 0.618 and 1.618; this number is known as the Golden Ratio.
In the Elliott Wave Analysis, we use some specific level to evaluate the retrace and potential next movement of the market; these levels are as follows:
Retracement:
0.09
0.146
0.236
0.382
0.5
0.618
0.764, some authors prefer to use the 0.786 level.
0.854, some authors prefer to use the 0.886 level.
Expansion:
0.618
1
1.272
1.414
1.618
2
2.272
2.618
Use of Fibonacci tools in the financial markets
Until now, we used neither a mathematical method to determine price targets. Consider that the price action is not compelled to respect a Fibonacci level by itself. These tools provide a probability zone to a reaction.
The following chart corresponds to AT&T (NYSE:T) in its daily timeframe. The bullish cycle started on August 24, 2019, when T found buyers at $30.97 per share.
The first Elliott wave movement calls for a leading diagonal structure, which made the wave 1 of Intermediate degree. Using the Fibonacci retracement tool, we observe that wave (2) retraces near to 38.2% o wave (1).
The wave (3) accomplishes the rule that commands “wave 3 is the largest wave.” In wave (4), we observe that respect the alternation rule that says, “if wave two is simple, wave four will be complex, and vice-versa.” This wave retraces between 23.6% and 38.2% of wave (3).
Finally, from wave (5), the price action drove to strike over the upper-line of the ascending channel.
The Elliott Wave Principle allows us to identify the primary trend and its correction. Also, it permits to recognize the maturity of the market, to determine price targets, and to
The Elliott Wave Principle allows us to identify the primary trend and its correction. Also, it permits to recognize the maturity of the market, to determine price targets, and to
The Elliott Wave Principle allows us to identify the primary trend and its correction. Also, it permits to recognize the maturity of the market, to determine price targets, and to provide a specific invalidation level. In this educational article, we will explain how to trade the Elliott Wave Principle.
Trading the waves
Before identifying a trading setup, we have to remember the basic structure of the cycle. Waves 1, 3, and 5 are motives and follow the principal trend direction. Waves 2, and 4 corrects the trend movement and moves in three internal waves. The following figure shows the basic structure of a cycle.
From the Elliott Wave cycle structure, we observe that waves 3, 5, A, and C, are tradeable. Waves 2, 4, 5, and B provide the retracement that generates the opportunities to entry following the direction of the trend.
Trading the wave three
Wave three characterizes by to be the best profitable movement of an entire Elliott Wave cycle. The following chart shows the way to trade wave three.
To place our entry, we have two options. The first alternative is following the retracement level, which could extend from 38.2% to 78.6%. The second alternative is to place the order after the wave B breakout.
The profit target is at least 100% of the Fibonacci projection from the origin, wave 1, and wave 2. Remember, the wave three rule “is not the shortest.” The second target is 127.2%, and the final corresponds to 161.8%.
The invalidation level is below the origin of wave 1; remember the rule “Wave 2 never moves below wave 1.” An alternative level is to set the invalidation below the end of wave C.
Wave three in action
Dow Jones Transportation (DJT), in its 8-hour chart, shows a bullish sequence that started on January 20, 2016, when the price found buyers at 640.33 pts. The first rally drove to DJT until 814.90 pts on April 20, 2016.
After this high, the price action retraced in three waves as an A-B-C sequence, piercing 61.8% of the Fibonacci retracement. From the chart, we observe the two possibilities to place the entry to the market. The first alternative is to go long between the 50% and 61.8%. The second one is to wait for a wave B breakout above 795.06 pts.
DJT reached the first target at 876.58 pts in the first half of November 2016. While the second target, located at 923.92 pts in early December 2016. However, DJT touched the third target at 984.21 pts on September 27, 2017.
[embed]https://youtu.be/JAkJPR4rBnE[/embed]
Hello, and welcome to this latest edition of courses on demand, brought to you by Forex Dot Academy. So, in this course, we’ll be looking
[embed]https://youtu.be/JAkJPR4rBnE[/embed]
Hello, and welcome to this latest edition of courses on demand, brought to you by Forex Dot Academy. So, in this course, we’ll be looking
Hello, and welcome to this latest edition of courses on demand, brought to you by Forex Dot Academy. So, in this course, we’ll be looking to provide you with a pretty comprehensive introduction to what’s called Elliot wave theory. So, just before we begin, there is, of course, inherent risks involved in trading the financial markets. So, please do take a brief moment to familiarise yourself with our disclaimer, if you do need to stop or pause this recording do feel free to do.
So, okay, let’s start with a very brief webinar outline we’ll start by giving you an introduction to Elliot wave theory! We will explain the origin of Elliot wave theory, and a little bit about the creator, and how this whole theory came about. Then we’ll have a look at the actual Elliot wave theory itself, and it’s referred to as the five-wave pattern. Now,within that there is what’s called impulsive waves we’ll have a look at those we’ll have we’ll have a look at corrective waves, and the fact that these wave patterns do repeat themselves, and of course there are variances on these waves as well. So, you can have a situation where you can have a series of waves even within waves. So, all this will become very transparent very shortly, and we’ll have a look at Elliot wave theory in practice as well. So, you can see it on a price chart, and we’ll finish by just looking at some of the difficulties that traders can have when applying Elliot wave theory okay. So, let’s start with an introduction to Elliot wave theory then. So, what’s important to be aware of it is that Ralph Nelson Elliot, and I put a picture of him up on the screen, and developed the Elliot wave theory in the late 1920s. Now,he believed that the markets who many believed behave in a very erratic manner actually trades in more of a repetitive cycle. So, to give you a bit of background behind Ralph Nelson Elliot he was born 1871, and he died in 1948 he was a US Treasury accountant. Now,in his 50s he began to study stock market data looking at price action, and he observed that stock market prices trend, and reverse in recognisable patterns, and this of course then was able to give birth to his Elliot wave theory and. So, to just encapsulate what the Elliot wave theory is. Now,this is a theory which suggests that market moves in clearly defined sequences of highs, and lows in a very repetitive manner and. So, the Elliot wave theory studies the movements of these sequences. So, at this point, I’d like to bring up just a fairly generic price chart, and because there is a couple of things before we begin that we would just need to point out to you. So, firstly it’s just important to know that our to recognise Elliott wave theory as a technical tool effectively which is used exclusively by technical traders, and what it sets out to do is also as well, it’s important to embrace the fact that markets are continually prone to trending, and reversing am I even in a linear fashion, and this particular chart is just a typical example it is a US dollar monthly price chart but what you can see is that this chart can move in a particular pattern either to the downside or to the upside. So, it can go through periods of trending lower in a very repetitive fashion, and of course, you can get slight reversals of that where you’re getting pullbacks in price action off those levels, and then you can reestablish these trend patterns. So, this is what Elliot was interested in is identifying, and trying to understand what is going on with these market movements, and of course the same applies to the upside you can go through periods of price action, and of course, be able to identify the pullbacks as well.
So these markets constantly go through periods of trending either to the upside or to the downside. So, you could have this just trending market on a number of occasions trending to the downside, and therein lies potential opportunities for your bears to look to the seller’s market, and you also get these opportunities to buy these markets as well, for your Bulls. So, markets never move in a linear fashion; they do not move in straight lines. So, we have to acknowledge that markets move in trends, and they reverse, and then they can move in trends as well, they can go through also periods of consolidation and. So, this is just the nature of the way that the markets operate. So, that’s just a little bit about just a brief introduction to Elliott Wave, because we’ll explain it. Now,in considerable more detail, and we’ll start with the basic principle of the Elliot wave theory is the five-wave pattern. Now,what this suggests is any major movement will unfold in a pattern of five waves, and in turn will be corrected via a pattern of three waves going in the opposite direction. So, just imagine this diagram here in the middle of your screen represents price action, and the movement of price, and we can identify that this market creates a high price point number one you can see it then pulls back to two it moves higher to three it then pulls back again to number four, and then we this market seems to peak at the fifth wave which is the fifth impulse pushing prices higher then look what happens, because the five-wave movement can be split into two distinctive segments, and we look at each segment very carefully but what happens after we see a price point they’re on-screen at five at the fifth wave we can then see that the market makes a reverses, and it makes a low at Point, and it then tries to push higher fails to make a new high, and makes a high at point B, and of course makes a third wave pattern to the downside in the opposite direction of the initial move. So, this is your impulse, and this is your correction. So, what Elliott would do, and he’ll be analysing a lot of price data is he’d be identifying these patterns existing in the markets either on the impulse side, and then looking at the correction side, and what he suggested was there’ll be interesting opportunities at these points, if you can identify them for opportunities to buy these markets at these levels and, if you can identify one three, and five what it will do for traders is potentially give them an opportunity in this case to sell the market, and benefit from this reduction or pullback in price action, and you can use this five-wave pattern to do that followed by a three-wave correction, and that is the basic premise behind Elliott’s wave theory. So, we will apply this technically in a chart very shortly, but I do want to just focus a little bit more on the impulse wave, and it’s being able to identify these one two five waves which we’ve just highlighted there in the box. So, this trend phase is known as the impulse phase. So, we’re getting impulses to the upside on again on numerous occasions, and I shall just briefly change the -colour. So, we’re getting these impulses pushing prices higher from these points on a price chart, and this is the end of the essence of the impulsive segment of this particular wave. So, we’re getting that trending price action pushing prices higher. So, this is the numbered phase. So, the first five phases are actually broken down as the numbered phase.
So, you’re looking for one two three four five-wave patterns on a chart, and an impulsive segment one two five is itself constructed as a series of five waves of which one three, and five impulses are of a minor degree. So, we’re experiencing a nice sizeable move in price action from the low to the outright high, and we’re able to identify with our understanding of this impulsive segment or the impulse waves, and we’re identifying potentially tradable opportunities within that okay. So, that’s just a little bit about the impulse wave. So, moving on to. Now,the corrective wave, and which we’re again going to look at the same representation of price action but actually there’s a little bit more to the corrective segment the corrective part of the corrective wave and elements of this particular Elliot wave theory. So, trends move in a series of peaks, and troughs or highs, and lows, and other technical analysts would refer to one as a high would refer to as a low would refer to three as a higher high will doing a slightly bigger would refer to for as a higher low. So, really it’s just a chain a slight change in terminology, and this number five would be a higher high once more. So, as price drives to the upside in phase one up to phase three, and up to phase five this the corrective wave actually focuses on the parts of the wave which result in prices pulling back. So, we also have the lettered phase as well, is known as the corrective segment, and has always counted in threes. So, whereas we’re looking for five waves to the upside, and we would also be looking, if you’re applying Elliot wave theory three waves to the downside in this particular example, and they’re always counted in threes, and to differentiate between the impulsive and the corrective wave we’re. Now,looking at ABC in terms of a price move. So, highlighting wave number two, and number four of the impulsive phase are also corrective waves, because those are the lows that are created, because of a correction of price, and that’s just means we get a pullback to that to that low, and that creates our wave number two, and wave number four. So, once we’ve satisfied that we see wave 1 then we see wave 2 we see a push higher at wave 3 we see the pullback at bay 4 then this constitutes Elliot the Elliot wave theory, and where you make a higher at 5, and then you see the reversal in that price action or the corrective second or the corrective wave. So, in addition to that waves 2, and 4 as a result of the impulsive phase are also corrective waves wave 2 corrects wave 1. So, we’re getting this push higher. So, this lower here correct the price action, because we don’t see price action moving in a linear fashion, and it does move in this impulse to the upside followed by a pullback followed by a further impulse followed by a pullback. So, it’s just following that as a narrative but being able to visually identify it on a price chart we have a look at some price charts very shortly to show you this in a little bit more detail. So, just be aware that wave 2 corrects wave 1, and of course wave number 4 corrects wave 3. So, the correction always comes after the impulse, and ABC is the corrective phase of waves 1 to 5. So, this is the corrective segment. Now,wave 2, and 4 is the individual correction, and then we enter once the price peak at 5, we then enter the corrective segment creating an A, B, and C corrective wave in this example. Now,other tools can be used to help identifying where a market will pull back, for example, at fib levels. So, you know those that that trade the market using technical indicators that may use fib levels they might draw a fib from the low the recent low to the recent high, and they might be able to gauge where this price action will actually pull back to even at Point a the first corrective wave or Point C which is the second corrective wave pushing lower. So, that can just present with opportunities for traders to actually look to engage with the fib, and there’s obviously many other trading indicators as well, which can be used in a similar fashion that can support the understanding as well, of Elliot wave theory.
So, moving on then to the fact that what’s important, whenyou understand the complete structure, and you identify you can identify these five-wave patterns, and you can see them in every chart in some capacity it’s important to understand that you know week you can experience with a very volatile moving chart that waves can repeat themselves on multiple occasions and. So, you can get these smaller waves existing, and these you get your 5 wave impulse followed by your ABC wave correction, and this has the tendency to repeat itself on many occasions especially, if we’re seeing, if we’re in a bit of a trend, and prices are pushing higher again followed by your three-phase correction and. So, the idea is that you can actually get many multiple opportunities of wave repetition, and it can effectively give you a little bit of foresight it’s important to notice what happens in this little phase in here, because what we’re seeing is a reversal in price action where we’re actually creating a series of repetitive waves to the upside followed by a series of repetitive waves to the downside in this particular side of the 5 wave pattern. So, this time we’re creating a five-wave pattern to the downside followed by again just to reiterate myself a three-wave corrective ABC pattern, and then that rolls in once more to an additional impulsive wave but this time to the downside. So, it is important to take on board the Elliott Wave it could be very useful in certain capacities to be able to analyse, and see what’s going on, and of course what you can also, and this is where Elliott Wave can start getting a little bit more difficult, but you can also have larger Elliott Wave signals even over, and above your smaller waves. So, this is effectively a five-way signal, for example, perhaps even on a much bigger timeframe, and you get your corrective phase as well. So, it’s just basically having an understanding of all of these aspects of the five-wave pattern, when it comes to Elliot wave theory okay. So, moving on then to the principle of, and we’ve kind of alluded to it already it’s the fact that you can find waves within waves. So,, if you look at this particular chart here it could be a one-day chart for example will have an impulsive segment where you can clearly identify the waves wave 1 2 3 4, and wave 5, and then you identify the corrective phase of ABC, and that could be on a one-day chart but. Now,you decide to have a look at a one-hour chart at this point, and what you can see even within one of these phases from 0 to 1 let’s say you can you can really experience on a smaller time frame many more opportunities which exists that that replicate this kind of wave pattern in a form of a phase whereas what you can see on a bigger timeframe is more of a linear move let’s say before you get that corrective pullback, and but you know you can always find waves within waves, because this theory can be applicable to any particular time frame on a price chart, and as the market moves it in favour you can see that this market would look at this kind of phase and will be able to contribute or correlate the impulsive wave followed by again just to repeat myself the corrective wave, and this can happen over, and over, and over. So, just bear in mind the principle of the fact that you can see experience, and identify waves within waves, and that does arm you with a lot of the knowledge, and understanding about Elliot wave theory, and how to go about applying it okay. So, what we want to do is exactly what we want to show you the five-way pattern in practice you know how can you go about identifying you know these levels, and these waves, and what decisions kind of trade, and make to try, and capitalise on them. So, what we’re going to do is we’re going to identify some significant areas we can see that we’re getting a little bit of an uptrend impulse here two-point number one. So, that would be a potential starting point for those traders that study Elliot wave theory creating a corrective wave at point number two then we’ll see that thrust, and this market creates another impulse driving prices to the upside once more at point number three before we would then get a slight corrective wave in this particular market before we get a really nice explosive move in this market to the upside, and what a trader who looks to apply Elliot wave theory does is potentially look to get into these markets at the pullback. So, they’d be looking very closely at this price action here, and determine whether they would look to get in to this market, and again, if we identified a fourth wave pattern they’d be looking for opportunities to buy this market, and as you can see you know that can be to varying degrees of success you might take a small winner, if you took a trade from the corrective wave number two, and as you can see, if you got into these prices at corrective wave number four you would have experienced a really explosive move to the upside.
So, so that is your five-way pattern but in addition to that you will also experience a pullback off the high they’re at five. So, you get your you know your corrective pattern falling into place where you get your low price at a then the markets try to push higher, and they fail to do. So, creating point number B a corrective wave B, and finally, we will see our corrective wave at Point C as well. So, that is the Elliot wave theory in a very practical sense. So, those that trade price action to the upside might then look to look for opportunities to maybe buy at this point or potentially sell at point number B. Now,they have a variety of different decisions to be made around C. So, this is where you know this is obviously an introduction to Elliot wave theory. So, there is a lot more to Elliot wave theory. So, hopefully, we’re just giving you a basic sort of introduction to what Elliot wave theory is. So, then what we can see just from this general price section as we start entering, and we can see that price has moved to the upside. So, again we start the Elliot wave process potentially giving opportunities for traders at this point to maybe look to buy at these levels at two, and four, and of course it’s a riskier trade but as opportunities to sell at one, and three as well, however, you must bear in mind that there are consequences, whenit comes to risk-reward as well, depending on whether you’re trading the impulsive phase or whether you’re trading the corrective phase. So, that’s just the potential application of Elliot wave theory to a price chart was moving which is moving to the upside, and which happens to be the current pound dollar price chart, and let’s show you the same situation, and this just happens to be the dollar-yen price chart very current price chart, and what we can see from this is we can see that prices are this time moving lower. So, we create the first wave we get a pullback we get a corrective pullback at point number two the markets then move lower at three they pull back to four, and they create a low this time, because whereas before we were looking for a trending market to push lower sorry higher. Now,we’re looking for a trending market to actually push lower. So, in this example. Now,we’d be looking for maybe opportunities to sell at two, and four. So, and again identifying these opportunities can be somewhat difficult, you might be presented with opportunities to buy off these lows; however, again that can impact a trader’s ability to manage risk effectively. So, we will discuss a few of these difficulties very shortly but that is the Elliott Wave pattern, and applying it to a market that is moving to the downside, and of course, we get that corrective phase once more. So, we get to pull back to point a prices try to break lower, and they fail to do. So, we get a point B, and then we get our final point C in this market again presenting some very interesting opportunities to different traders at different price points, and different wave points as well, whether it’s impulsive or whether it’s corrective okay. So, let me just take this off the screen, and let’s discuss some of their the difficulties that traders can experience, whenthey look to apply Elliot wave theory, and there’s just a few of them to be aware of just going through the last couple of examples there I’m sure you may be sitting there looking at our screen, and perhaps suggesting right well, how, and why did you decide on those particular points?
And how would a trader actually truly look to capitalise on it, because the reality is there’s actually a lot more to Elliot wave theory in terms of your practical application, and, because of that it can be very difficult to use, and interpret for new experience traders. So, it is definitely more for those that have a little bit more experience understanding seeing and identifying price movements. So, there it is regarded that those that have considerably more experience of understanding price movement, and price action might be in a position to be able to apply Elliot wave theory in a little bit of an easier format it can also be difficult to identify the beginning of a wave as well. So, again I’m sure you’ve probably looked at those charts, and said why did you start a point one and. Now,we do. So, for very specific reasons but again a lot of that is more of an advanced sort of aspect to Elliot wave theory traders can struggle to identify entries, and exit prices as a result of identifying perhaps a corrective low point two or point four whatever the case may be, and actually looking to trade that signal is a little bit more difficult, and finally traders do not always understand the effectiveness as a tool from a risk management perspective, and actually that’s a really quite important one because, if you create a corrective low at 0.2 or 0.4, and then those lows can be used as very accurate price points to utilise from a risk management perspective only, if that trader is has a comprehensive understanding of risk management because, if you get a break of those corrective lows then the principal of the Elliott Wave no longer exists this is this really with some of the difficulties that traders can have it would create what’s called structural failures in these markets, and that would actually imply that something else is going to happen in that market, ie that first corrective phase fails in terms of impulsing, and driving prices to the upside it actually turns around reverses it creates that structural failure, and actually then that market is the likely or outcome is for that market to actually be pushing lower instead of initially pulling higher, if we replying Elliot wave theory okay. So, that just about concludes this introductory session – Elliot wave theory. So, we’ve had a brief introduction. So, hopefully, you. Now,know who he is, and what the basic principle of the theory is about we’ve had a look at the five-wave pattern, and that’s broken down in impulsive waves corrective waves, and wav now repetition, and also the understanding that you, you may be able to identify and see waves within waves, and Elliot wave theory as well, in practice applying it to a price chart, and then just touching upon some of the difficulties that traders can have, whenapplying Elliot wave theory. So, on that note that does conclude this particular webinar. So, thank you very much for joining us on this installment of courses on demand brought to you by Forex dot Academy, and we do hope to see you all very soon. Bye for now.
An extension is an essential feature of an impulsive movement. In this article, we will see what the characteristic of this type of movement is.
Extensions
An extension is a
An extension is an essential feature of an impulsive movement. In this article, we will see what the characteristic of this type of movement is.
Extensions
An extension is a
An extension is an essential feature of an impulsive movement. In this article, we will see what the characteristic of this type of movement is.
Extensions
An extension is a movement that characterizes the longest wave of an impulsive wave. This movement allows us to differentiate between an impulse and a correction. An extension may appear in waves 1, 3, or 5, but it will never appear in more than one wave. In the following figure, we see the extended wave of “blue” degree and the “black” grade wave corresponds to the upper degree structure.
Extensions of extensions
As in the previous case, extensions can have internal extensions. The rules for this scenario are the same as in the case of simple extensions.
The following figure corresponds to the Dow Jones Industrial Average (DJI) in the semilog scale. The chart shows the impulsive wave that begins with the October 1987 low at 1,616.2 pts., and concludes on October 2007 when DJI touched the 14,198.1 pts. The cycle ended when DJI made a new low in 2009, reaching the 6,470 pts.
Dow Jones chart shows that the third wave of blue degree is the extended wave. Additionally, the third wave of the black degree is the extension of the extension in the bullish cycle.
Table 1 – ETFs Based on Gold
Table 2 – ETFs Based on Silver
Both the RSI and the Awesome Oscillator display a bearish divergence, that helped us to identify waves (3) and (5).
