Essential Elliott Wave Patterns Pt. 1

[RichardCox 10]

Essential Elliott Wave Patterns Pt. 1

 

To its critics, Elliott Wave analysis is an arbitrary, subjective, and ultimately inaccurate way of looking at price activity in the financial markets. But since many of these critics are not fully aware of the rules that govern these methods, it is clear that some of this disagreement comes a basic misunderstanding of the rules that govern the essential patterns. At its best, Elliott Wave theory signals instances where major market trends have reached an exhaustion point. When used correctly, this form of analysis can generate buy signals when prices have become excessively cheap or sell when prices have become irrationally elevated. This meets our central market criteria to “buy low, and sell high.”

 

So, even if Elliott Wave analysis does not signal an exact turning point for when price activity has risen to an extreme (and is in need of a correction), it does help traders identify instances where contrarian positions are likely to benefit. Here we will look at some of the basic patterns that make of the core of the Elliott approach, and then outline the rules for completion that take some of the “subjectivity” out of the equation.

 

Motive Waves

 

The driving price movements that define the markets broader trend are called Motive Waves. Here, you can think of these price moves as the “locomotive” that drives that larger trend. In Elliott Wave analysis, Motive Waves occur in groups of five, and these groupings are always labeled 1-2-3-4-5 on Elliott Wave charts. In the first charted example, we can see how the Motive Waves define a larger bull trend.

 

Rules for Motive Waves:

 

1) Wave 1 is an Impulse or a Leading Diagonal pattern.

2) Wave 2 is a corrective pattern, but is not a Triangle.

3) Wave 2 cannot retrace more than 100% of first wave in the pattern.

4) Wave 3 is an Impulse.

5) Wave 3 extends beyond wave 2.

6) Wave 4 is the next corrective pattern.

7) Price regions in Waves 2 and 4 must be separate (no overlap).

8) Wave 5 is an Impulse or an Ending Diagonal.

9) Wave 5 is at least 70% of length of wave 4 (taking away some of the subjectivity in the analysis).

10) Wave 3 cannot be the shortest leg when relative to waves 1 and 5.

 

The Diagonal, or Diagonal Triangle

 

In Elliot Wave analysis, the Diagonal goes by a few different names and can be divided into Leading Diagonals (LDs) and Ending Diagonals (EDs). Diagonals are 5-wave move patterns (always labeled in 1-2-3-4-5 fashion) that are relatively common, and move in conjunction with the broader trend. As we can see from the next charted example, Diagonals operate inside two tightening channel lines (think wedge formation) that are drawn using waves 1 and 3, and waves 2 and 4. The internal structure of Leading and Ending Diagonals differs however, with Ending Diagonals being the much more common structure of the two. Figure 2 is an example of a Bullish Diagonal.

 

Rules for Diagonals:

 

1) Diagonals function inside two converging channel lines

2) Channel lines contract, with similar directional slopes (either bullish or bearish), and will never be horizontal.

3) Wave 1 of a Leading Diagonal can be viewed as an Impulse Move

4) Wave 1 of an Ending Diagonal forms a Zigzag (and can be a double or even triple Zigzag)

5) Wave 2 is a corrective pattern (but not a Triangle).

6) Prices in Wave 2 never exceed Wave 1.

7) Wave 3 of a Leading Diagonal is an Impulse Move.

8) Wave 3 of an Ending Diagonal is a Zigzag (and can be a double or even triple Zigzag)

9) Prices in Wave 3 always exceed those seen in Wave 2.

10) Wave 4 is a corrective pattern.

11) Waves 2 and 4 overlap.

12) Wave 5 of an Ending Diagonal is a Zigzag (and can be a double of even triple Zigzag).

13) Wave 5 of a Leading Diagonal can be an Impulse Move or Ending Diagonal.

14) Price length in Wave 3 exceeds that of both Waves 1 and 5

15) Price length in Wave 5 must exceed 50% of Wave 4.

16) Price extension in Wave 5 cannot be longest relative to Wave 1 and Wave 3.

17) Price length in Wave 5 cannot exceed that of Wave 3.

 

Corrective Waves (Moves that Oppose the Larger Trend)

 

The idea behind Corrective Waves is that they literally “correct” the extreme price activity that is seen during trends, and puts market valuations closer to their short, medium, and long term averages. In Elliott Wave analysis, corrective wave patterns can unfold in three or five waves, and are labeled with letters (A-B-C). Since we are looking for prices to “correct” and move toward their historical averages, these Waves will work in a direction that OPPOSES the dominant trend. Within the “corrective wave,” the term Zigzag is also applied with regularity. Zigzags are structures that unfold in three legs and are labeled A-B-C. Zigzags move counter to the broad trend and are one of the most commonly found patterns in Elliott Wave analysis. Figure 3 shows a corrective move (the colored section) which follows the major trend move.

 

Rules for Corrective Waves:

 

1) Wave A will be either a simple Impulsive more or a Leading Diagonal.

2) Wave B is a corrective pattern.

3) Price length in Wave B is shorter than Wave A.

4) Wave C is an Impulsive Move or an Ending Diagonal.

5) Price length in Wave C measures at least 70% of Wave B.

 

Double ZigZags, Triple Zigzags

 

Double ZigZags and Triple Zigzags (sometimes abbreviated as DZ or TZ) have all the regular characteristics of regular Zigzags, except that they represent two or three Zigzag patterns strung together. These multiple Zigzags are connected by another wave (called the X Wave). Zigzags are corrective, by nature, but it is still relatively rare to see a triple Zigzag because price usually does not take this long to correct. Remember, prices could simply flatline and this would still qualify as reverting to the mean (because the mean catches up to the price, rather than the other way around). In some cases, Zigzags, Double Zigzags and Triple Zigzags might be referred to as Sharp patterns, or Zigzag family patterns. Labeling in Double Zigzag patterns is done using w-x-y terminology, and Triple Zigzags are labeled as w-x-y-xx-z. Figure four shows a double Zigzag in both bull and bear directions.

 

Rules for Zigzag Patterns:

 

1) Wave W is a Zigzag.

2) Wave X is a correction but cannot be an Expanding Triangle.

3) The length of the price move in Wave X is less than that of wave W.

4) Wave Y is a Zigzag.

5) The length of the price move in Wave Y is greater than or equal to that of Wave X.

6) Wave XX is a correction but cannot be an Expanding Triangle.

7) The length of the price move in Wave XX is smaller than that of wave Y.

8) Wave Z is a Zigzag.

9) The length of the price move in Wave Z is greater than or equal to that of Wave XX.

 

Conclusion: Understand the Structural Rules of all Price Patterns before Establishing Positions Using Elliott Wave Analysis

 

Many new traders attempt to establish Elliott Wave trades using the often-discussed parameters of five trending waves along with three corrective waves. While this does outline Elliott’s main assertions, there are many specific details that can separate correct analysis from a mistake that is highly likely to result in losses. Here, we look at the specific parameters of some of the most basic patterns – all of which are essential for conducting proper Elliott Wave analysis. Come of these patterns are more common than others, but it is important to have an understanding of all examples, as there will be cases where some structures invalidate others. In part 2 of this article, we will cover the remaining patterns necessary for understanding proper Elliott Wave methods.

[SunTrader 10]

Markets (in the form of price waves however they are defined and labeled) are sometimes known to not follow the rules,

 

What then?

 

By that as an example an impulsive wave 3 (in a picture perfect five wave move) turns out to be the shortest wave - start the count all over?

 

Its no good even though price turns and reacts as it should to a 5 wave completion

 

Don't tell me bring out the X's and Y's or alternative mangled labeling re-labeling sheeesh.

 

Price marches on.

[JohnTaylorHK 10]

Hi guys,

 

Whilst it is very nice to have the rules laid out like this, there is one very important fact that is often missed when discussing any "wave" theory details, and that is the accuracy of the ZigZag algorithm being used. The only non-subjective ZigZag algo that I know of is Zeiss' Fractal Wave Algorithm (FWA), which underpins Dow theory, upon which most if not all of this work is based. Now FWA is notoriously difficult to program, and there are many "programmer decisions" to be made. All of which again lead to subjective ideas of what a ZigZag is, and hence how the waves themselves are formed.

 

This is one of the few pieces I have seen that makes the point that "mean follows price" and NOT (by definition) the other way round. This, of course, questions all mean reversion strategies which seem naive in light of this fact.

 

Best

 

John (Manila)

[tradingwizzard 10]

Markets (in the form of price waves however they are defined and labeled) are sometimes known to not follow the rules,

 

What then?

 

By that as an example an impulsive wave 3 (in a picture perfect five wave move) turns out to be the shortest wave - start the count all over?

 

Its no good even though price turns and reacts as it should to a 5 wave completion

 

Don't tell me bring out the X's and Y's or alternative mangled labeling re-labeling sheeesh.

 

Price marches on.

 

I disagree completely with your statement......it just means that your count was wrong, and you missed something......this is why you are supposed to have a SL......I trade 7+ years now using mainly Elliott

 

TW

[SunTrader 10]

I disagree completely with your statement......it just means that your count was wrong, and you missed something......this is why you are supposed to have a SL......I trade 7+ years now using mainly Elliott

 

TW

Did I say I trade without a stoploss.

 

Anyway we will have to agree to disagree.

 

And I'll continue using EW - when it is right - but always trade price above all.

[tradingwizzard 10]

Did I say I trade without a stoploss.

 

Anyway we will have to agree to disagree.

 

And I'll continue using EW - when it is right - but always trade price above all.

 

price action is the first to look at, of course.....but even that is considered to be labeled with Elliott (range = corrective wave, trend = impulsive wave, etc.)

TW

[SunTrader 10]

price action is the first to look at, of course.....but even that is considered to be labeled with Elliott (range = corrective wave, trend = impulsive wave, etc.)

TW

That is what I do. But I don't force it to make a count that in actuality is not there.

 

EW is NOT there 100% of the time in 100% of the markets.

 

As you know Elliott developed it on the Dow.

 

BTW originally these "rules" were no such thing. They were in fact guidelines.

 

It was only after prodding from the public and his book publishers he felt obligated to "iron-clad" his theory. Give them what they want. Nothing in trading then, now or in the future is absolute.

[tradingwizzard 10]

That is what I do. But I don't force it to make a count that in actuality is not there.

 

EW is NOT there 100% of the time in 100% of the markets.

 

As you know Elliott developed it on the Dow.

 

BTW originally these "rules" were no such thing. They were in fact guidelines.

 

It was only after prodding from the public and his book publishers he felt obligated to "iron-clad" his theory. Give them what they want. Nothing in trading then, now or in the future is absolute.

 

indeed guidelines, as most of the original work uses words like "most likely", "typical", and so on, nothing specific.

 

However, there are still some rules that need to be there. For example the third wave should not be the shortest one.

 

TW

[SunTrader 10]

indeed guidelines, as most of the original work uses words like "most likely", "typical", and so on, nothing specific.

 

However, there are still some rules that need to be there. For example the third wave should not be the shortest one.

 

TW

They were all guidelines - originally.

 

So then I am wrong on this Gold chart.

 

Wave 3 of Wave A is the shortest. Throw the count out.

 

Except it worked. That is what I go by. Otherwise I am waiting around for things to be perfect. And miss out.

 

As I said, we can agree to disagree.

[tradingwizzard 10]

They were all guidelines - originally.

 

So then I am wrong on this Gold chart.

 

Wave 3 of Wave A is the shortest. Throw the count out.

 

Except it worked. That is what I go by. Otherwise I am waiting around for things to be perfect. And miss out.

 

As I said, we can agree to disagree.

 

oh no no....totaly wrong........this is corrective all the way (what you labeled12345)....it is channeling too well, corrections are almost the same......so no......late in the evening here but tomorrow I will redo the counting and post it here.......DEFINITELY WRONG!

 

TW

[SunTrader 10]

oh no no....totaly wrong........this is corrective all the way (what you labeled12345)....it is channeling too well, corrections are almost the same......so no......late in the evening here but tomorrow I will redo the counting and post it here.......DEFINITELY WRONG!

 

TW

Hate to sounds like a broken record.

 

Post away but as I say agree to disagree.

 

You might be right but there is never definite in trading. You should know that.

 

If you don't well ........

[tradingwizzard 10]

somehing like that.....c=a and the correction (or at least one leg to the upside seems to be done)......classical zigzag

[SunTrader 10]

somehing like that.....c=a and the correction (or at least one leg to the upside seems to be done)......classical zigzag

Thanks but you stick with yours and I'll stick with mine because as you can see with this chart version with fib time and price levels all duly noted for each wave they are almost perfect.

 

Waiting around for 100% perfection is :doh:.

[Stock.Jock 10]

I tried to study the Elliot Wave theory; however, it got so confusing with all the waves, subwaves, microwaves, quantum waves, on and on. There's thousands of combinations of these waves and it seems never ending. Is their a quality educational course with instructors who have backgrounds in education? Experienced traders don't necessarily make the best trader educators. Is there an academic university that teaches this as part of their finance department?

[Peterthemonkey 10]

Quote:

Originally Posted by SunTrader »

Markets (in the form of price waves however they are defined and labeled) are sometimes known to not follow the rules,

 

What then?

 

By that as an example an impulsive wave 3 (in a picture perfect five wave move) turns out to be the shortest wave - start the count all over?

 

Its no good even though price turns and reacts as it should to a 5 wave completion

 

Don't tell me bring out the X's and Y's or alternative mangled labeling re-labeling sheeesh.

 

Price marches on.

 

I disagree completely with your statement......it just means that your count was wrong, and you missed something......this is why you are supposed to have a SL......I trade 7+ years now using mainly Elliott

 

TW

 

Here's the issue as i see it, you have qualified waves 1, 2 and 3, then you have potentially qualifying waves 4 and 5, which may or may not develop.

 

If waves 4 and 5 do not develop does that mean you had the "wrong count" for waves 1, 2 and 3?

 

I am not saying you can't trade whatever way you trade, just that there are many claims made in this business without definitive supporting evidence, such as the market always moves in 5 waves. Unfortunately this is always supported by after the fact examples, which ignore or violate prior examples and/or wave moves in order to fit the mold.

[tradingwizzard 10]

Thanks but you stick with yours and I'll stick with mine because as you can see with this chart version with fib time and price levels all duly noted for each wave they are almost perfect.

 

Waiting around for 100% perfection is :doh:.

 

sunny,

 

there's a saying that if 10 people look at an Elliott Wave count then the outcome is different for all of them......

 

TW

[tradingwizzard 10]

I tried to study the Elliot Wave theory; however, it got so confusing with all the waves, subwaves, microwaves, quantum waves, on and on. There's thousands of combinations of these waves and it seems never ending. Is their a quality educational course with instructors who have backgrounds in education? Experienced traders don't necessarily make the best trader educators. Is there an academic university that teaches this as part of their finance department?

 

Well, no offence, but try harder.......confusing or not, rules are rules and the only way to succeed is to do your own labeling and counting and to make sure scenarios are validated

 

TW

[tradingwizzard 10]

Quote:

Originally Posted by SunTrader »

Markets (in the form of price waves however they are defined and labeled) are sometimes known to not follow the rules,

 

What then?

 

By that as an example an impulsive wave 3 (in a picture perfect five wave move) turns out to be the shortest wave - start the count all over?

 

Its no good even though price turns and reacts as it should to a 5 wave completion

 

Don't tell me bring out the X's and Y's or alternative mangled labeling re-labeling sheeesh.

 

Price marches on.

 

 

 

Here's the issue as i see it, you have qualified waves 1, 2 and 3, then you have potentially qualifying waves 4 and 5, which may or may not develop.

 

If waves 4 and 5 do not develop does that mean you had the "wrong count" for waves 1, 2 and 3?

 

I am not saying you can't trade whatever way you trade, just that there are many claims made in this business without definitive supporting evidence, such as the market always moves in 5 waves. Unfortunately this is always supported by after the fact examples, which ignore or violate prior examples and/or wave moves in order to fit the mold.

 

hi there,

 

nice meeting you.....it is always a pleasure to share ideas with somebody that knows Elliott like you and Sunny here

 

regarding your post, from my point of view Elliott works only from a top-down analysis point of view.......what this means is that you are counting monthly, weekly, daily charts, and then pick your entries and SL on 4h and 1h charts...invalidation means something is wrong and have to do it again.....the beauty of top-down analysis is that by the time you are actually trading on the 1h or 4h chart your SL is smaller that your initial analysis on the monthly chart suggested

 

regarding your post, Elliott is a summ of scenarios, and by the time one is invalidated, the one that stands still is the winning one...

 

again, I trade mostly Elliott.....and this is what I do

 

TW

[Stock.Jock 10]

What I've noticed in a lot of trading forums is that there are people who claim to be experts in a trading method, but come short of actually knowing the method, whatever it may be - Elliot Wave or anything else. Usually, they take shortcuts and defend their shortcuts like they know better than the original author. I may not know Elliot Wave analysis, but I can tell from this discussion that this is true here too. If there is no consensus here on Elliot Wave analysis, then someone here doesn't know how to do it.

Well, no offence, but try harder.......confusing or not, rules are rules and the only way to succeed is to do your own labeling and counting and to make sure scenarios are validated

TW

[Peterthemonkey 10]

hi there,

 

nice meeting you.....it is always a pleasure to share ideas with somebody that knows Elliott like you and Sunny here

 

regarding your post, from my point of view Elliott works only from a top-down analysis point of view.......what this means is that you are counting monthly, weekly, daily charts, and then pick your entries and SL on 4h and 1h charts...invalidation means something is wrong and have to do it again.....the beauty of top-down analysis is that by the time you are actually trading on the 1h or 4h chart your SL is smaller that your initial analysis on the monthly chart suggested

 

regarding your post, Elliott is a summ of scenarios, and by the time one is invalidated, the one that stands still is the winning one...

 

again, I trade mostly Elliott.....and this is what I do

 

TW

 

Hi tradingwizzard,

 

Definitely no expert here on EW. I have looked into it in the past, as objectively as I could, and never found objective repetitive 5 wave counts - without exceptions.

 

What your post describes is form fitting. Take a stock that starts trading one day and ends trading another day, can you always validate a valid wave count for its trading life - without exception? Projecting that a hypothetical future development will validate the wave count requires a leap of faith into the realm of probability and possibilities, facts from which a strategy can be devised. This is not proof of an inviolable 5 wave concept.

 

Again, I have no issues with how you trade, however that does not validate EW. The claim is made that markets always move in 5 wave patterns - but evidence to substantiate that claim under peer review scrutiny is never made available.

[SunTrader 10]

Here's the issue as i see it, you have qualified waves 1, 2 and 3, then you have potentially qualifying waves 4 and 5, which may or may not develop.

 

If waves 4 and 5 do not develop does that mean you had the "wrong count" for waves 1, 2 and 3?

 

I am not saying you can't trade whatever way you trade, just that there are many claims made in this business without definitive supporting evidence, such as the market always moves in 5 waves. Unfortunately this is always supported by after the fact examples, which ignore or violate prior examples and/or wave moves in order to fit the mold.

Kind of merged two posts together here so I'm guessing the question is directed towards me?

 

EW is no different than any other technical way of trading. Decide what you believe is happening, put a trade with a stop in place and wait for the results.

 

Do wave counts change - all the time. So.

 

Do OB/OS oscillators swing back and forth or give wrong or just plain lagging signals. And lets talk about the Lag Kings themselves MA's or MA crossovers.

 

Whether I am using EW or a few other things in my tech toolbox I lay out what I think price should do to confirm I am right AND what price should to confirm I am wrong.

 

Not much more you can do no matter what you use.

[SunTrader 10]

(Sintrader) :rofl:

.........

But if I haven't convinced you,and you really think you need a mentor why not ask one of the worlds leading EW "experts" (Prechter) exactly how much money he's made shorting the market since 2009?

Oh yeah and he did even better in the mid 90's year after year calling for a crash.

 

He was right ........ eventually. :doh:

 

But he makes his by teaching, not trading.

 

Can you imagine. Wow!

 

Another rule follower. Actually he probably wrote a few that even old man Elliott probably never fathomed.

[tradingwizzard 10]

No,i don't want that Wiz...I need certainty,after all,i've worked hard enough these past years haven't I ?

And I've a right to expect that someone (you) who emphatically claims that another's (Sintrader) () count is incorrect prove it..put up or shut up.So far i'm not convinced.

 

I don't see the point of a trading forum in which any discussion doesn't convince me the participants know what the hell they are talking about.So far the only one who gets my respect is Sintrader- for breaking the rules and presenting a chart,which personally I like the look of.

 

10 different people 10 different counts..Christ...even politicians couldn't screw up a wave count this badly

 

JOKING ASIDE

 

Design your own rules,it's a hell of a lot easier to follow your own rules than someone who apparently compromised his theory to satisfy a bunch of non traders-you call that integrity? you think that is a role model? you think that's worth all the blood sweat and tears trying to make sense of something that is flawed?

Every theory is flawed otherwise you would have certainty,instead all we got is probability.

You show me certainty wizzard and I will shine your shoes.

 

As for the other poster who is considering finding a suitable tutor..what is the point? There is not a single EW analyist that I have come across in 8 years who does not continually on a daily/weekly basis change their count..Christ what does that tell you? Why guys want to torture themselves in this way is completely beyond me.It is simple self delusion/perception bias.

 

Admit it,you are searching for the holy grail while publically acknowledging no such thing exists.

Anything you apply to the market is a guesstimate and a compromise.You can be extremely good at that,devising your own systems/models/strategy.And they can be wave theories inspired by Elliott or whatever,but at least you will understand them.That is time far better spent because the bottom line is that nobody..absolutely nobody has proved EW theory works.Wizzard isn't gonna prove it here which makes it laughable that he should seek to convince Suntrader that what works for Suntrader is wrong.Sounds like religion to me,,just believe, EW works in mysterious ways....not good enough.This is similar to cult brainwashing in which you are continually being persuaded that it is you that is inadequate and the theory is sound.

 

RANTING ASIDE

 

 

Elliott Wave Fractals

 

This looks a hell of a lot easier to work with.I've been backtesting it a bit and with an additional idea added to it,a variation on the SINGLE rule..guess what? you identify the sub waves.

Not an extensive test so far but

 

1- I do have 8 years of study/trading experience to compare the analysis with

2- As long as I don't saddle myself with the idea that there must be 5's and 3's i'm sure I can remain objective in evaluating it.

3- 1 week testing this will be worth more than 1 year studying EW

4- the only thing that matters as far as waves go is identifying when one wave ends and another begins.This idea with my own adaptations will either be useful or it wont.At this point i'm in a better position to judge

Whereas for...

 

... beginners never let anyone on a trading forum persuade you that you must study something for years to understand it.

All speculation must show returns or it's a waste of money

All study and analysis must show returns or it's a waste of time

Time has more value than money.

 

IMHO nothing will waste your time more than EW if you don't bring your own ideas to it.

But if I haven't convinced you,and you really think you need a mentor why not ask one of the worlds leading EW "experts" (Prechter) exactly how much money he's made shorting the market since 2009?

 

hey mits...great post, really....not asking anybody because this is what I do ....trade with Elliott..no kidding.......check my Live thread and see if I am ok or not....anyways, I got your point of view and I think it is valid, but, on the other hand, looking for 100% certanties will just waste your time..couse something like that don't exist...wo I would say Elliott has pretty good chances..

[tradingwizzard 10]

Oh yeah and he did even better in the mid 90's year after year calling for a crash.

 

He was right ........ eventually. :doh:

 

But he makes his by teaching, not trading.

 

Can you imagine. Wow!

 

Another rule follower. Actually he probably wrote a few that even old man Elliott probably never fathomed.

 

easy to talk, hard to do it.....come on!

[tradingwizzard 10]

Hi tradingwizzard,

 

Definitely no expert here on EW. I have looked into it in the past, as objectively as I could, and never found objective repetitive 5 wave counts - without exceptions.

 

What your post describes is form fitting. Take a stock that starts trading one day and ends trading another day, can you always validate a valid wave count for its trading life - without exception? Projecting that a hypothetical future development will validate the wave count requires a leap of faith into the realm of probability and possibilities, facts from which a strategy can be devised. This is not proof of an inviolable 5 wave concept.

 

Again, I have no issues with how you trade, however that does not validate EW. The claim is made that markets always move in 5 wave patterns - but evidence to substantiate that claim under peer review scrutiny is never made available.

 

well, no offence intended but I do believe that only the one that is not understanding or not knowing Elliott enough makes such statements...I am not an expert, but I trade many years now on Elliott....and please don't tell me it's not profitable as I am the living proof