The Ultimate beginner guide to the ELLIOTT wave

 The Ultimate beginner guide to the ELLIOTT wave

Welcome to the ultimate beginner guide to the ELLIOTT wave theory .

Learning from this blog

• Overall rules and guidelines of the Elliott wave theory.
•  How to identify basic market movement? 
• Wave characteristics ( equality alternation, Truncation, Targets). 
• How institutional and retail traders use it a a roadmap to understand and forecast significant price reversal
• You will understand how to trade using Elliott waves as a beginner 
• Advantages and disadvantage of Elliott wave theory

History 

The Elliott wave theory was created by ralph nelson Elliott . Elliott was an American accountant. he begins study of financial market in the early 30's. The result from that study was called the wave principle. This book Elliott says market followed natural laws that could measured with Elliott and Fibonacci numbers.

In his 40's Elliott expended his ideas beyond the market and wrote a book with ambitious title called natures law the secrets of the universe. He passed away two years after that .

Working Principle

The Elliott wave theory is grounded on the very basis assumption which is that the market moves in a 5 3 wave patterning other words the market advances for 5 waves then retraces or corrects for 3 waves.

 This is the central idea from which all the rules and guidelines of the Elliott wave theory came from

The five wave that advance price in one direction collectively form one motive wave and they are label from 1 to 5.

The three waves retrace against the motive wave collectively form one corrective wave they are label from a to c Notice that the larger motive wave is broken down into five sub waves the the large corrective wave .Broken down into 3 sub waves here we arrives at the definition of impulse and corrective wave.

Impulse and Corrective wave

 In order words a wave that goes in the same direction as the wave in a larger degree is called impulse wave and the wave that goes in the opposite direction of the wave in the larger degree is called corrective wave.

In that sense wave 1, 3, 5, A and C are impulse wave because they goes in the same direction of the wave in the larger degree waves 2, 4 and B considered to be corrective wave because they go in the opposite direction of the wave in the larger degree.

 Notice that we have this idea of wave degree we need that waves repeat inside themselves multiple degrees in other words Elliott waves have a fractal quality. 

We can see the fundamental 5-3 wave pattern repeating inside itself in three different degree notice how the illustration begins to resemble price action as more degree are show. According to Elliott wave theory there are nine wave degree and there is a labeling convention to keep things organized. 

Cycles In Elliott Wave

The largest cycle of all is called the grand super cycle then we have the super cycle, cycle which is the wave count that spans from years to decades. The primary degree which is the wave count that spans from months to years . The intermediate degree which is the wave wave count that spanned from weeks to months the minor degree which is the wave count that spanned from days to weeks the minute degree degree and finally sub minute degree .

Trying to keep track of all nine degree is not productive exercise keeping trace of three wave degree is already a challenge because there are instances. where you will find multiple possible wave count in each wave degree

There are three element that characterize Elliott waves they are form ratio and time.

The waveform is the fundamental 5-3 pattern we have already talked about this is the most important element.

The ratio element is the  vertical ratio between waves which is often used in combination with Fibonacci tools according to the theory distinct ways will respect specific Fibonacci ratios and that can be useful in certain aspect of the analysis .

The third element is time which is the horizontal ratio between different waves which also respect Fibonacci ratios according to the theory. Out of these three element the from takes precedence over the other in other words the 5-3 pattern is more important than the vertical and horizontal ratios between different waves.

Rules and Guidelines in Elliott wave

1. wave 2 cannot extend beyond the start of wave 1
2. Wave 3 cannot be the shortest wave
3. Wave 4 cannot retrace into the territory of wave 1
4. All motive and impulse waves must have 5 sub waves
5. Even through wave 5 might not surpass wave 3, wave 3 must always surpass wave 1.