See Figure Il. The Sth leg of the expanding type, however, must exceed the extremity of the 3rd leg to qualify as such. This pattern is fairly rare in daily or weekly price action but is quite common in hourly charts.
This is because corrective patterns have more vati- ations than impulse waves. At times a corrective pattern becomes apparent only in retrospect; that is; when they are completed and behind us. The complexity of corrective waves can increase or decrease without warning, sothe extent or depth of corrections are less predictable than impulse waves.
Furthermore, dividing that same Fibonacci number by the one immediately following it will yield the ratio 0. And, dividing that same number by the number which succeeds it two places in the sequence results in the ratio of 0.
And, dividing that same number by the number which succeeds it three places in the sequence will yield the ratio 0. The ratio 0. Elliott considers these ratios to be the primary determinant of the extent of price and time movements in any market.
For example, the length of Wave 3 in a five wave sequence would be influenced by the length of Wave 1, rather than by the length of Wave 2. Difficulty in this aspect arises from two sources 1 Deviation from the mathematical ratios of parts of the pattern.
As the reader will see from the preceeding examples, the degree of difficulty in forecasting the termination of a correction pattern increases proportionately as the number of basic pattems join together. Insubsequent pages we have attempted to categorize guidelines and observations under several headings.
It must be remembered that many of the relationships between waves, especially those reflecting the aspect of Fibonacci ratios, are mere tendencies — not permanent relationships cast in concrete.
A tendency may bemore prominent than another during the author's marketexperience, but there isno law that saysthese relationships cannot change. Whatis common now may become rare when the market undergoes a major cyclical change. Until the evidence is in, a tendency should be treated as just that, a tendency.
Some of the most common tendencies are provided in subsequent pages. The subjects are classified into several categories; some of them are provided under more than one heading to give an easier cross-reference, a. In terms of time spent in completing a pattem, corrective waves are more closely related to each other than to the impulse waves.
Turning points in the forex markets are easier to recognise as they occur, if projections of time and price movement fall into the same area, and are supported by the completion of an acceptable wave pattern, However, Fibonacci time multiples are insufficiently reliable for use in forecasting the peaks and troughs of certain movements. Turning points do occur often enough at Fibonacci time targets to be beyond coincidence. But miscues also occur sufficiently enough so as to diminish the value of Fibonacci related time targets.
The rest of the time is spent on corrections. Itis only 3rd and Sth waves that have momentum standards to meet. Therefore, the most effective way to use rate-of-change indicators with wave analysis is to downgrade momentum readings until a suspected "3rd of a 3rd" phenomenum is seen.
If the indicators do not confirm the wave analysis by then, look for other likely patterns, However if Wave 1 kicks-off to the accompaniment of a prominent divergence between your indicator and price activity, the trend has probably changed; your wave analysis is almost certainly correct. Since the 3rd wave can be shorter than the Ist wave, butrarely so, predicting its terminus is a veritable trap to the unwary analyst. If it is not shorter than Wave 1, Wave 3 maybe equal to, or 1.
In the case of extensions Wave 3 can even be 2. One of the most effective ways to recognise a 3rd wave in a five way sequence is by its slope. It is almost always steeper than the ist; experience shows that it is often represented by an almost vertical line. By its nature a 3rd wave is the most destructive of all impulse waves and should not hug a trendline drawn between the origin of Wave I and the end of Wave 2.
The only possible indicator that can make the distinction is volume. If the thrust occurs in record or heavy volume, itislikely to be a3rd wave, possibly extended. In this phase, investors find new reasons to buy in the case of bull markets, or sell in the event of declines. Since by then the economic background begins to improve or deteriorate, as the case may be, fundamental reasons pile upon technical considerations to make 3rd waves as powerful as they are, This makes it imperative for an analyst to recognise the onset of 3rd waves before the fact as they offer immensely profitable trading opportunities.
Third waves are not always longer than Ist waves. However, they are almost always more powerful technically i. Once a 3rd wave exceeds the length of Wave 1, project its length as 1. If Wave 3 extends, the next objectives are 2. The extent of the 4th wave may be derived as a Fibonacci ratio to the extent of Wave 3.
The length of the Sth wave may likewise be obtained as a Fibonacci ratio of the price travel from the origin of the Ist wave through to the end of the 3rd wave. The typical relationship in a five wave sequence is this: Wave 5 is 0.
Very often, Wave 5 is also 1. These relationships assume that Waves 1 and 3 are not extended. During Sth waves, a deterioration of the momentum picture becomes evident, Most divergences between the direction of momentum indicators and the price activity are seen during Sth waves. Fifth waves reflect the element of bullishness or bearishness which has been building up continuously over the preceeding four waves. This awareness shows-up first among the market professionals who are closely involved with the market on a daily basis.
The general private investor, as usual, comes last. Ifthe 3rd wave isextended, Wave and Wave 5 will tend tobe equal in terms of length of price travel, or equal in the length of time taken by the movement from the point of origin to the terminus. In the event of an extension, the middle of the "3rd wave of the 3rd wave" usually marks the centre of the entire 3rd wave movement.
Awesome as extensions maybe, it is one of the least understood phenomena under the Wave Principle. A succession of first and second waves of lesser and lesser degree generally mimic terminal patterns, so the ensuing resumption of the trend usually catches the unwary analyst by surprise. Elliot did not lay down any method to tell in advance whether a wave is extended or not, But based on market experience, a series of overlapping waves at a point in the wave structure where horizontal triangles or diagonal triangles are not expected, usually turn out to be an extension.
When the extended wave in asequence of five waves is the Ist,expect the subsequent correction to target the area of the 2nd wave, instead of the usual 4th wave.
This is especially true if the Sth Wave in the sequence is smaller by far compared to the 3rd wave. This tendancy increases if the 2nd wave traces a "flat" or "irregular" pattern. The principle as expounded by R. A simple, deep correction zigzags, double zigzags in Wave 2 should give rise to a complex, sideways correction flats, irregulars, triangles, double or triple threes in Wave 4. Inmy experience in the forex market however, the Principle of Alter- nation holds true more on the extent rather than the pattern of correc- tions.
For instance, if Wave 2 has retraced If Wave 2 has retraced The alternation of patterns may take place, but significant exceptions may be observed from time to time. The more consistent alternation process occurs in the extent or depth of corrections rather than in its patterns or forms.
This principle also requires us to look for different formations in double or triple-threes. In a double-three, the most common pattern isa flat and azigzag. Ifa triangle occurs, itis almost always the last pattern in the correction phase. Two successive flats implies a third pattern, usually a triangle.
A triple-three may be composed of three flats. In a triangle, the principle entrusts us to look for different patterns between the adjacent and integral legs. Leg A will not be the same as leg B; B will not be the same as C, etc. One is to watch every price "tick", trying to read in it any glimmer of confirmation as to the course of the market.
The other is tostep back, decide on a strategy, and then let the market consolidate foras longasit takes. For analysts, the first approach is unavoidable. But for the investor the second would be more appropriate, Follow the maxim — if in doubt, stay out. Corrections tend to bring prices back to the area of the previous 4th wave of one lesser degree, and usually to just beyond the extremity of that 4th wave, Elliot enumerated eight types of corrective patterns, and then ob- served that they may double or triple in extended sideways consoli- dations.
It is the single most common cause of a flawed forecast and ill-timed expectations. If the correction starts with a complex, sideways pattem a flat, irregular ora triangle , the damage to the prevailing impulsive trend is usually limited to Similarly, a consolidation that takes some time to finish is a prelude to explosive action once the corrective pattern terminates.
Fifty percent retracements are common in five wave sequences, but do not occur as frequently as The termination of a zigzag pattern does not guarantee that the correction is over since the retracement forms can take up complex patterns. Still, the analyst should stick with the simplest completed pattern in accordance with the Principle of Parsimony Occam's Razor.
N, Elliot also stated that the simplest pattem is likely to be the correct explanation most of the time. Elliot was never able to define precise rules for anticipating the more time-consuming corrective pattems. In double zigzagging patterns the second zigzag should terminate substantially below the bottom of the first in a bull market. Conver- sly, the second zigzag should end well above the peak of the first in a declining market.
At the start of a turn-around from a major decline, pessimism is usually more pronounced at 2nd wave bottoms than at the actual lowest point from whence the Ist wave originated. The converse is true at the peak of a bull market. Fundamentally, the market appears bleakest at the bottom of 2nd waves in a bull market, while the economic situation appears the brightest at the 2nd wave peak of a major market decline.
It should not be overly difficult to recognise the terminus as it is occuring. But even the usually reliable Fibonacci ratios are of no help in predicting the ending point in advance.
All that Elliot can offer is projection of probable stopping points. That is why the trading of 2nd waves should be avoided, 13 It is more common for 2nd waves to be simple a zigzag or double- zigzag and 4th waves to be complex flat, irregular, triangles, double-threes or triple-threes, etc. A parallel trendline is then drawn from the end of Wave 2.
This trendline, in conjunction witha pertinent Fibonacci ratio, should provide insights as to the point in time window where the 4th wave correction should end.
Given the timing reference, the analyst should be able to deduce what pattern is likely to occur in the 4th wave. If the 4th wave ends above or below the trendline as in the case 95 percent of the time , a new line is drawn from the end of Wave 2 through the terminal point of Wave 4.
A parallel trendline is then drawn from Wave3. The specific purpose is todetermine the probable ending point of Wave 5. As before, using Fibonacci derived objec- tives, the analyst may project the time frame where the Wave 5 is likely to peak.
If the slope of the projection derived by this method asthe same degree of steepness as Wave , then the Fibonacci targets are almost certainly correct. Itmay happen that a portion of the price activity may lie outside the channel drawn this way, especially in Waves 1 and 3.
This is of no conse- quence in the Elliot Wave channelling method. Usually, the Sth wave will commence immediately after the breach. Failure to attain this objective is a significant sign of the potential strength of the subsequent retracement. Elliot once observed that a market which hugs the innertrendline the lower one in the case of bull markets; the upper line in bear markets makes for dramatic moves once the 3rd wave pulls away from that trendline and starts heading for the opposite channel line.
Ifa reversal occurs at that level, and the wave is valid, then the projection is most probably correct. The primary victim of this surge in confidence is very often the small private investor. The ordinary investor is usually "sucked in" near or at the end of the major trend, By the time he is aware of the market move, all the professional traders have been and gone. Ina flat correction, the end of Wave C will tend to be higher than the terminus of Wave A. Given the above situation, if Wave C has retraced at least If a pattem starts with a 3-wave structure, and subsequent market action rules out a double zigzag, then the correction will very likely trace out a flat or an irregular formation.
A flat formation is considered as a complex correction; and so are irregulars, triangles, double threes and triple threes. Irregular corrections 2» Itis extremely common for C waves in irregular flat corrections to be 1. Wave B in an irregular correction is frequently 1. If Wave B is 1. On rare occassions, Wave C may be 2. Itis also fairly common for the distance between the impulse wave's peak and top of wave B to be equal to the distance between the end of Wave Aand the bottom of Wave C.
Ina bull market irregular correction, the bottom of Wave A is almost always higher than the bottom of Wave C. The converse is true in a bear market irregular correction. If the patter starts with a 3-wave structure, and subsequent market development rules out a double zigzag, then the correction will very likely trace out a flat or irregular formation.
Usually, this conjunction marks the extremity in price. But if the ensuing correction of the entire five-wave sequence takes the form of an irregular pattem, then by definition, the peak of the irregular correction Wave B will exceed the orthodox top.
The converse is true for any five-wave sequence going downwards. Horizontal triangles 2 3 The triangle is one of the most reliable forms under the Wave Principle. Its appearence is practically a guarantee that the prevailing trend will continue.
A triangle is a holding pattern which separates two waves in the same direction Waves A and C, or Waves 3 and 5. However, E waves never exceed the extreme point hit on Wave C.
See diagram on following page. The Dow Industrials stood at But the brash forecast in this new book called for a Great Bull Market. It became a runaway best seller. Three decades is enough time for investors to deem a book about an investment method as "classic," and surely the jury is in on this one: Elliott Wave Principle is now published in seven languages, and continues to sell thousands of copies every year.
In Europe, Asia and the Americas, literally millions of investors worldwide use or recognize the Elliott Wave method for profitable investing. Elliott Wave International is proud to present the 10th edition of this investment classic. It's designed to help the Elliott Wave novice and the veteran practitioner.
It's time to consider what this definitive text offers you. Here's a sample of what you'll learn: The basic tenets of Wave Theory: You'll read simple explanations of the terms, and how to identify all 13 waves that can occur in the movement of stock market averages. The rules and guidelines of Wave analysis: You'll learn the basics of counting waves, how to recognize the "right look" of a wave, plus lots of simple steps for applying the rules. Jamie Voong. Poorya Bagherpoor.
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