4.53 Recap: Elliott Wave Theory


Ø Elliott waves are a demonstration of nature’s self-similarity property observed in ‘fractals’.

Ø Every wave can be broken down into smaller, similar waves that are a copy of the whole.

Ø A market comprises of ‘impulse’ waves and ‘corrective’ waves.

Ø The market is usually made up of a 5-3 wave sequence where the impulse wave is the first five-wave pattern (denoted in numbers) and the corrective wave is the next, three-wave pattern (denoted in letters of the alphabet).

Ø In a five-wave pattern, the waves 1, 3 and 5 are the three impulse waves. Waves 2 and 4 are corrective waves.

Ø One can observe that the impulse waves 1, 3 and 5 are made up of self-similar, smaller five-wave patterns; in the same way the corrective 2 and 4 waves are each comprised of smaller 3-wave clone patterns.

Ø Corrective patterns may be classified into three broad groups – zigzags, flats and triangles.

Ø Wave labeling is complex and requires rigorous practice to be mastered, but the rewards can be substantial.

Ø Three rules must be observed while labeling waves:

Ø Wave 2 can never go beyond where Wave 1 started

Ø Wave 3 must never be the shortest impulse wave

Ø Wave 4 can never encroach into the same price zone covered by Wave 1


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