4.51 Basic Rules and Some Guidelines for Elliott Wave 

Basic rules and requirements of Elliott wave theory.
 
Elliott Wave Analysis depends for its success upon accurate identification of the waves. Correct labeling of the waves enables us to take a view on the likely move of the market, and thereby to position ourselves correctly as long or short.
 
So, we need to follow some Rules and a few Guidelines.
 
The Rules are cast in stone, and may NEVER be broken. The guidelines, however, may be relaxed sometimes, but are still invaluable in wave identification. These rules and guidelines are as follows:
 

Ground Rules

 
A wave is an Elliott Wave only if:
 
  • Wave 2 never falls below the starting point of wave 1.
  •  

  • Wave 3 is never the shortest one among waves 1, 3 and 5.
  •  

  • Wave 4 never crosses into the territory of wave 1.
 

Guidelines

 
The following points are just guidelines and are broken at times.
 
  • Wave 2 and 4 often bounce off from the Fibonacci retracement levels. This fact supports the theory that the trend is continuing.

 

  • Wave 3 is generally the longest one out of waves 1,3 and 5 and is also steeply inclined.

 

  • Sometimes wave 5 fails to move beyond the end of wave 3. This is called truncation.

 

  • Wave 5 generally breaks above the ascending channel of the impulse wave or the resistance line joining the peaks of the impulse wave.
 
Please note that all these rules and guidelines are about the impulse wave. The corrective waves have a lot of variations, as indicated in previous chapters, and hence are not bound by rules.

   

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