Elliott Wave Patterns
Today, we will explore the various Elliott Wave Patterns. Elliott Wave can be one of the most confusing things that you’ll try to learn in your trading career or it can be a very simple to understand and simple to implement the concepts and ideas. In this article, you’ll learn about the most common Elliott Wave patterns, how it works and how you can use it. The concept behind Elliott Wave is based on price structure and the way markets move and it can be an extremely valuable tool to have in your toolkit.
The Elliott Wave theory basically states that market prices unfold in specific and predictable patterns. The most common Elliott Wave pattern is represented in the form of the five wave movement in the direction of the trend followed by three corrective waves moving in the opposite direction of the prevailing trend. Out of the five wave movement, the wave number 1, 3, and 5 are the impulsive wave within the sequence while wave number 2 and 4 are corrective waves
Since Elliott Wave is fractal in nature, it means that each impulsive wave can be subdivided into 5 waves of smaller degree and each corrective wave can be subdivided into 3 waves of smaller degree. In Elliott Wave theory, the 8 waves move composed by 5 waves up, followed by 3 corrective waves down is a completed cycle.
There are simple and straightforward rules that need to be followed in order to confirm the Elliott Wave count:
- Wave 2 never retraces more than 100% of Wave 2;
- Wave 4 never retraces more than 100% of wave 3;
- Wave 3 travels beyond the end of wave 1 and it’s never the shortest one;
If the initial five-wave movement is pretty much straightforward we can distinguish various types of corrective patterns. In Elliott Wave, the corrective pattern comes in 2 shapes: sharp corrections and sideways corrections. The Elliott Wave patterns can be classified into 3 main categories: Flat, Zig-Zag and triangle.
Elliott Wave Flat Pattern
An Elliott Wave flat pattern comes in three forms, regular, expanded and running. This pattern moves against the primary trend direction and at the end of the cycle, we should expect a continuation in the direction of the trend. For the simplicity of this article, we’re going to refer only to the regular flat corrective pattern in an uptrend. The main rules this Elliott Wave pattern must obey are as follows: wave B always stops near the starting point of wave A, and in the case we’re breaking above this point we’re dealing with an irregular or expanded flat, and secondly wave C always breaks below the termination point of wave A, and in the case we fail to do so we’re dealing with a running flat.
Elliott Wave Zig-Zag Pattern
An Elliott Wave zig-zag pattern is a three wave structure labeled as ABC, which can be subdivided into 5-3-5 waves of smaller degree. In this sequence, both waves A and C are impulsive waves while wave B is a corrective wave. Usually, wave C travels the same distance in price as wave A and it’s most common to appear developing in wave 2 of the 5 wave cycle.
Elliott Wave Triangle
The last pattern that we’re going to refer in this article is the triangle pattern which is a form of a prolonged sideways action in the market, which has the tendency to appear more frequently in wave 4 of the 5 wave cycle. For simplicity, we’re going to refer just to the ascending triangle which in order to be confirmed must be confirmed by the following rules:
- The triangle must exhibit a clear ABCDE wave structure;
- Each wave should be subdivided into 3 waves of smaller degree;
- The tops of the waves peak near the same price, following a horizontal trendline;
- The bottoms of the waves should follow an up-sloping trendline.
For the simplicity of the article, we have only discussed the most common and frequent patterns that show up on a daily basis on your chart but the reader must keep in mind that there are more variations of the Elliott Wave patterns presented here.
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