Elliott Wave theory
Impulse and corrective waves, the rules that define them and how traders use a count.
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Lessons
- 01What is Elliott Wave theory?Elliott Wave theory says prices move in repeating patterns driven by crowd mood. A trend unfolds in five waves, three with the trend and two against it, then corrects in three waves labelled A, B and C. The same pattern appears at every scale. Counting waves is subjective, and evidence that it predicts prices is weak.
- 02Impulse waves: the five-wave move.An impulse is the five-wave move that carries an Elliott Wave trend: waves 1, 3 and 5 go with the trend and waves 2 and 4 pull back. It must pass three rules: wave 2 never goes past the start of wave 1, wave 3 is never the shortest trend wave, and wave 4 never enters wave 1's price range.
- 03Corrective waves: zigzags, flats and triangles.Corrective waves are the moves against the trend in Elliott Wave theory, labelled with letters. The three basic shapes are the zigzag (5-3-5, sharp and deep), the flat (3-3-5, sideways, with wave B retracing about 90% of A or more) and the triangle (five legs, A to E, usually narrowing). Corrections can also join into combinations.
- 04Trading with Elliott Wave counts.Trading with an Elliott Wave count means using the labels to set three prices: an entry after a correction ends, a stop at the level where the count breaks a rule, and a target from Fibonacci guidelines. Counts are subjective and change often, so the invalidation level matters more than the forecast.