The 3 waves A, B, and C make up a larger degree corrective wave (2) Corrective waves start with a five-wave counter-trend impulse (wave A), a retrace (wave B), and another impulse (wave C). The 5 waves move in wave 1, 2, 3, 4, and 5 make up a larger degree motive wave (1)Ĭorrective waves subdivide into 3 smaller-degree waves, denoted as ABC. Wave 2 and 4 are corrective waves and they are subdivided into 3 smaller degree waves labelled as ((a)), ((b)), and ((c)). In Figure 1, wave 1, 3 and 5 are motive waves and they are subdivided into 5 smaller degree impulses labelled as ((i)), ((ii)), ((iii)), ((iv)), and ((v)). Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. In Elliott’s model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend. 1.3 The Five Waves Pattern (Motive and Corrective) This information (about smaller patterns fitting into bigger patterns), coupled with the Fibonacci relationships between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid reward/risk ratios. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. Ideally, smaller patterns can be identified within bigger patterns.

These patterns can be seen in long term as well as short term charts. The three wave correction is labelled as a, b, and c.

The movement in the direction of the trend is labelled as 1, 2, 3, 4, and 5. Simply put, movement in the direction of the trend is unfolding in 5 waves (called motive wave) while any correction against the trend is in three waves (called corrective wave). 1.2 Basic Principle of the 1930’s Elliott Wave Theory Elliott first published his theory of the market patterns in the book titled The Wave Principle in 1938. Elliott based part his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Inspired by the Dow Theory and by observations found throughout nature, Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves.Įlliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns. He was an American accountant and author. 2.5 Relation between Fibonacci and Elliott Waveġ) Elliott Wave Theory: Modern Theory for 21st Century Market 1.1 What is Elliott Wave Theory?Įlliott Wave Theory is named after Ralph Nelson Elliott (28 July 1871 – 15 January 1948).2.4 Fibonacci Retracement and Extension.1.5 The Rise of Algorithmic / Computer-Based Trading.1.3 Five Waves Pattern (Motive and Corrective).1.2 Basic Principle of the 1930’s Elliott Wave Theory.Elliott Wave Theory 1) Elliott Wave Theory: Modern Theory for 21st Century Market

Wave count falling wedge