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Elliott wavelengths. Elliott wave theory: what is this method and how can it be implemented in the modern financial market? Elliott wave trading strategy

Cyclicity is inherent in all natural processes: ebb and flow, the change of seasons, the phases of the moon, and many other examples confirm this. Similar phenomena are observed in the economy, which was first noticed by Charles Dow and the first theory that can really be applied in stock trading was the Elliott wave analysis.

We note right away that, despite the outward simplicity of the basic principles, the theory of waves is one of the most complex sections of technical analysis and its full presentation is beyond the scope of this article. We will cover only the basic concepts that will help beginners continue their study of it through the books of Ralph Elliott and his followers.

Here is a summary of what will be described below:

  1. Interpretation of basic models of Elliott waves and their components.
  2. The basic principle of wave theory and an overview of its popular patterns.
  3. Trading signals in combination with other tools, as well as the main advantages and disadvantages of the Elliott theory.

So, for an initial understanding of the essence of the Elliot wave theory, you first need to understand the principles of building its main models, namely: what waves they consist of and how they form on the price chart.

Basic Wave Theory Models

It is believed that all price movements in any financial market and trading asset can be represented as an eight-wave model, which can be used to predict further price movement and optimal points for opening and closing positions with a high probability.

The wave theory considers sections 1, 3, 5, a and c to be impulse, and 2, 4 and b to be corrective, and each of them indicates a certain market condition:

  • No. 1. Usually, the first movement is a rather weak impulse, since at the beginning of the transaction a small percentage of traders open, and market makers prefer a wait-and-see position. Having reached its peak, small players begin to take profits, and as a result, the first corrective wave begins to form.
  • No. 2. At the starting point, there are positions opposite to the main movement in the expectation that the first wave was false and the market will return to its original positions. The Elliott wave theory confirms the presence in this zone of a strong one, created by large players to “squeeze out” smaller and newcomers from the market. Reversal patterns such as "" and "Double/Triple bottoms" are often formed here.
  • Number 3. The largest wave in terms of time and dynamics. Almost all of the previous wave has been worked out and market makers become masters of the situation, pushing the price in the direction they need. Market volumes increase sharply, price gaps appear (), the movement begins to be supported by the main market crowd. Trading practice shows that even the majority of positive fundamental events fall precisely on the period of the third wave.
  • No. 4. The first profit-taking after an active movement, as evidenced by the transition of the market to a sideways movement with the appearance of the “triangle” graphic pattern.
  • No. 5. The last impulse to open positions in the direction of the main trend due to traders late to the beginning of the third wave, after which the trend finally ends and a global reversal begins. In different markets, wave theory gives its typical fifth waves: in stocks it is often the shortest, even less than #2, and in commodity futures, on the contrary, the longest. In Forex, it is close to the classical model.

The dynamics of changes in market volumes begins to lag behind the price movement, oscillators appear on the oscillators, confirming the imminent end of the trend.

  • a. Beginners often interpret it incorrectly, assuming just another correction, after which the trend will resume again. In fact, the market situation has changed radically and you can see this by going to a smaller one, where divergences and discrepancies in volumes and prices will be more clearly visible.
  • b. The situation is completely similar to the second wave - the first correction of the new trend. In addition to opening new positions, those who made a mistake with the entrance on sections No. 4 and No. 5 can exit the market with minimal losses here. the correction may test or even break through the previous local highs or lows with the formation of the “Double Top” pattern.
  • c. Confirms the complete and can be considered as the beginning of a new model.

Like any other, models in their classical form are very rare in the real market, and wave analysis includes special sections for working with such “non-standard” patterns and false signals:

The nesting principle and the main patterns of Elliott waves

Each wave should include a five-wave pattern on a smaller time frame for impulses and a three-wave pattern for corrective ones. This is the basic principle of the theory: each element of the cycle includes a subcycle, and so on ad infinitum.

In addition, in this way it can be confirmed that we are facing a part of the Elliott model, and not a chaotic market movement. As an analogue, we can cite the popular strategy “Three Screens of Elder”, where a signal on a larger timeframe is confirmed by shorter intervals:

Elliott waves form a series of reversal and trend continuation patterns that allow you to more accurately predict the price movement. Examples of commonly used patterns:

Trading signals combined with other technical analysis tools

In addition to pattern trading, Elliott patterns work well with other technical analysis tools such as Fibonacci levels, channel trading strategies, using wave start and end points as support and resistance levels. To illustrate, here are a few practical examples.

→ №1. The rebound of the price from the important ones confirms the beginning of a new Elliott wave. Accordingly, this combination of signals can be used to open a deal in a certain direction.

→ №2. In this example, the price bounced off the boundaries, which signaled the end of the correction and the beginning of a new wave. In this case, beforehand, after the corrective movement (b), Buy Limit was set at the lower border of the channel.

Unfortunately, in addition to its advantages, Elliott's theory has several significant drawbacks:

  1. Long model formation time

Recall that Elliott created his theory during a period when trading was carried out manually and by telephone: the market was slower and the minimum period for analysis was a day, not hours and minutes like today. Therefore, the best results are given by daily and weekly timeframes, which is unacceptable for traders with small deposits.

  1. Ambiguity in construction and interpretation of results

Waves are built according to price highs/lows, constantly deviate from the classical model, the moment of their beginning and end is also difficult to determine unambiguously. All this leads to the fact that in one section of the chart, you can build several completely dissimilar structures that give completely different forecasts. The experience and professionalism of a particular analyst or trader, for example, comes to the fore. Beginners should study the theory for at least a year before they start plotting Elliott Waves on a real chart.

  1. Impossibility of automation

Despite the fact that there are special indicators for building Elliott waves, the quality of their work remains in question due to the factors described in the previous paragraph.

The Elliott Wave Theory streamlined many disparate methods of technical analysis and hypotheses about how stock cycles are related to the actions and reactions of the market crowd, and this is its undoubted advantage. But its complexity limits its effective application by a narrow group of professionals, and it is not in vain that the phrase “where there are two wavers there are at least three opinions” was coined.

At the end, a video about the main provisions of the theory of Elliott waves:

So, fellow traders, today you have received introductory and practical information on Elliott waves, learned the essence and principles of this theory, as well as the basics of building and using its models in trading.

In one of the following publications, I will supplement this topic with a selection of technical tools for automatically plotting Elliott waves on a chart. Don't miss this post and keep for updates.

Sincerely, Alexander Siver

We continue the cycle of articles on technical analysis and today we will talk about Elliot waves. This tool will help you to better understand the nature of the market, because in fact it reflects the deep fundamental processes taking place in the market - fear of participants, greed, euphoria, etc. Understanding the behavior of the market, you will begin to understand what is happening now with a particular security or the market as a whole and draw conclusions about further trends.

Elliot Wave Theory

The American accountant Ralph Elliot in the thirties of the twentieth century found the principles of the movement of stock prices. He determined that the nature of price changes is subject to certain rules. If you look at any chart, you can see the alternation of different segments of the past movement in the form of a wave. The price moves to the top of the wave, then goes down and so on constantly. The wave theory in was known before, but it was based only on the behavior of market participants, and Elliot used historical data for 80 years.

Studying market charts, Elliot developed the wave theory, which is now known to everyone involved in investing and stock trading. Such a theory is applicable to any markets, since the movement of prices is determined by people and society that obey the laws of nature (psychology, sociology, physics, etc.). Activity in the market rolls like waves of the sea, breaking up into smaller ones. Elliot came to the conclusion that the wave theory is a special case of the fundamental laws of the universe.

In 1938, the book "The Law of Waves" was first published with a detailed presentation of this theory. However, Elliott wave theory found practical application only in the eighties, when the well-known analyst Robert Prechter wrote a book on the use of wave theory for the technical analysis of market prices.

Elliot based his theory on Fibonacci numbers. The Fibonacci numbers 3, 5 and 8 make up a complete wave cycle. These are five waves of the growth cycle, the corrective cycle of three waves, and the full cycle is eight waves. There are three up waves and two down waves in a growth cycle. There are two down waves and one up wave in a corrective cycle.


All these waves have external distinguishing features. The cycle consists of two different movements. The first is an impulse, the main direction of the market, and the second is a correction, a wave rollback or a temporary stop in the formation. Correction is always opposite to the trend, the strength of the correction is usually less in length or equal to the impulse. Both concepts are relative and interdependent. That is, after any impulse, a correction follows, which does not exist without an impulse. There are also differences in movement characteristics between them. The impulse is always sharply expressed, and the corrective movement may have a slow or horizontal (lateral) development.

The main difference between impulse and corrective movement is the internal structure of these movements. The term "impulse" itself began to be used by Prechter. Elliot referred to such a movement as "motive" (motive), defining this stage of market behavior as the most important and significant. Each cycle of market movement is characterized by growth or decline. Elliot's merit in developing a formula for the relationship between impulse and corrective movements in the structure of the cycle.

An impulse always consists of five waves. In an impulse movement, three waves go with the trend, and two go against. There are three waves in the corrective movement. Here, on the contrary, two are on the trend, and one is against. To designate these models in the system of technical analysis, the names “five-wave” and “three-wave” have developed. But this is still not a mathematically accurate model, and the 5:3 formula is rather arbitrary. It reflects the very principle of different types of price movement. In practice, cycles can take the form of 9:7, 13:11, and the like.

To display different cycles, a digital designation is adopted for impulse waves, and an alphabetic designation for correction waves. That is, the impulse is the waves with numbers from one to five, and the correction is the waves A-B-C. An important part of Elliot's theory is his axioms. These are the provisions on the maximum and minimum wavelength and non-crossing of waves. Axioms are the basis for the correct recognition of the nature of the wave.

Elliot Wave Nesting Concept

The most important regularity of the Elliot theory is the nesting of waves. This state is also called fractality. Any wave can be considered part of a larger wave. And just like that, this wave contains several smaller waves. At the same time, the principle of the nature of the waves is preserved. Each impulse wave contains five waves, and all corrective ones consist of three waves.

There can be a lot of such degrees of nesting. Ralph Elliot distinguished nine levels in a trend development cycle. The "great supercycle" takes 200 years, and the shortest degree exists for only a few hours. The basic rule of wave theory is that at any degree of investment, the trend will always form in accordance with the basic eight-wave cycle.

Thus, a wave hierarchy is created, where each timeframe has its own place. The basic formula of the cycle structure will be preserved at any observation scale, up to tick charts. Outwardly, it looks as if each cycle is reproduced on all scales in exactly the same, self-similar form. Charts of a higher scale contain the same charts of smaller scales, ending with a tick one.

In Elliot's theory, there are no familiar concepts of timeframes. He introduced the concept of degrees, the main of which is called Cycle. Above are Supercycle and Grandsupercycle. Practical application have the lowest degrees. These are Primary, Medium and Small. Even lower are the Minute, Small and Ultra Small. To understand the description of cycles, special notations were introduced, which are used by specialists in wave analysis. Numbers are used to designate waves along the trend. For corrective waves, Latin letters are used. If nested waves are reflected on one chart, then larger waves are indicated by large letters and numbers or capital letters, smaller waves are indicated by capital letters.

Main models of price movements

Elliot, in developing the theory, almost did not deal with the definition of individual signs of waves (the English term is “wave personalities”). Robert Prechter developed this side of the theory in more detail. Elliot considered three impulse waves, Prechter in his book changed the terminology and considered the individual characteristics of all waves. Knowing the signs of waves for technical analysis is useful, especially in cases where it is difficult to get a clear picture of the wave count.

Signs of waves will be unchanged in any hierarchical degree. Most of the first waves appear at the bottom of the market in the form of a rebound from the minimum levels. In a five-wave design, the first wave is the smallest in length. In some cases, the first wave forms very quickly, especially if it originates at the very bottom of the market.

The distance traveled by the first wave is almost completely covered by the corrective movement of the second wave. Sometimes the lows of the second wave touch the initial values ​​of the first. However, it should be confidently kept much higher than the level of the first wave countdown. Traditional graphic patterns are formed from such movements. It can be a “head and shoulders” (inverted), as well as “double bottom” or “triple bottom” patterns.

The fastest growing and longest of all, usually the third wave. This rule is most accurately observed in the stock market. When the third wave crosses the level of the highs of the first wave, then this is considered a classic breakout and an appropriate signal to open positions. All trend trading systems from this point on come into action in the hope of an increase. During the development of the third wave, the increase in trading volumes rapidly increases, and frequent gaps (gaps) are indicated on the charts. This wave has the highest probability of stretching.

The fourth, that is, the corrective wave, forms more complex structures. This manifests itself in the forms of consolidation, flat, range, various types of flags and triangles. The main rule for the fourth corrective wave is to be above the high of the first wave. Otherwise, it will already be a reversal.

The fifth wave is not as dynamic as the third and is less stretched. In the process of the formation of the fifth wave, discrepancies appear between the readings of technical analysis indicators, such as MACD, and the price movement. This phenomenon is called divergence, and it warns that the top of the market is close to being reached. (see articles about or.

The first corrective wave, which is marked "A", is quite difficult to correctly identify in time. Its inception seems to be a small setback in the development of the fifth wave of growth. This wave can be most accurately determined by its internal structure when it is divided into five waves of the lowest level. If by this time a divergence is clearly visible on the indicators, then we can assume that wave A has formed.

At this moment, the formation of wave B begins. It can be characterized as the inertia of the upward movement. This wave can reach previous highs, and even slightly exceed these highs. In such cases, double and triple tops are formed, and oscillators show serial divergences. Trading volumes during the growth of wave B are small, since the majority of buyers leave the market.

Wave C fully confirms the end of the uptrend. This wave moves well below the low of wave A, giving sell signals. If the levels of wave C coincide with the levels of the fourth wave of an uptrend, a head-and-shoulders pattern may form. It often serves as a strong reversal signal.

All these are signs of impulsive waves and their components, which are directed along the trend. The signs of corrective waves are not so clearly expressed, their analysis and precise definition are more complex. All corrective waves are united by the fact that they cannot have five waves of the lowest degree. In most cases, these are three waves, but in triangles there may be more. There are four main models of corrective waves.

The simplest pattern is the zigzag. This is a three-wave configuration directed against the trend. It forms five waves of the first phase and three in the others. The second is a flat corrective wave with three waves in the first phase. This wave is also called a consolidation and it indicates the strength of an uptrend.

Triangles most often appear during the formation of the fourth wave, before the final movement in the main direction. Various triangle shapes can signal a continuation of a trend or an approach to a top. To identify a triangle, you need to find four points of lows and highs through which the trend lines are drawn.

The last type of correction waves is relatively rare. These are double and triple wave triples, that is, combinations of two or three combinations of a-b-c. Connecting, they give seven or eleven waves. These complex models are very similar to a consolidation rectangle (otherwise - a trading range).

Wave theory signals

The fact that the trend movement is five waves is typical only for ideal market conditions. It often happens that some impulse wave is stretched, taking an elongated shape and forming 5 additional waves. Stretching of the first wave occurs quite rarely. In stock markets, the third wave stretch is most common.

The stretching property of impulsive waves provides opportunities for forecasting. As a rule, one wave of the formation is always stretched, which means that the other two will be similar in length and time. This implies another possibility of forecasting, since the market does not create waves that are close in shape twice in a row. In this case, the alternation rule tells you what next waves can be expected. In practice, this way you can determine what kind of correction can occur. For example, after a simple model, a triangle is possible and vice versa.

A very important feature of the theory of waves is the possibility of building price channels. By building a channel, you can identify distant price targets, as well as confirm the completion of the wave count. The lower border of the channel is drawn through the lows of the waves, and the upper one - through the top of the first wave. With the further development of the trend, prices rarely go beyond these limits. If the border breaks through confidently, then this is a signal for a change in trend. We see a similar beating on the VTB stock chart:


Driving Forces of Wave Formations

Elliot created his theory based on the analysis of stock market indices, more precisely, the Dow Jones index. He tried to find links between the economy and the "mood of the masses". The market is the result of the social and economic activity of human society, it is she who is the driving force behind market changes. The wave theory quite accurately reflects the processes taking place in the stock market.

The more steadily stock prices rise, the more buyers appear, and when prices fall, more people want to get rid of them. Since the movement is determined by the behavior of a large number of players, the addition of a mass of players to the main movement causes an increase in the corresponding intensity. And when the price reaches a certain (fair) level, a correction process appears.

The behavior and composition of market participants can explain the intensity of movement and the length of the waves. This is clearly seen in the example of the growth in the share price of the well-known company Tesla Motors. Here the picture emerges from $17, the price of the stock at the time of entry into the market. On the chart, we see that five growth waves are formed, then three correction waves and the beginning of a new rise:


The main buyers of the first wave are large funds that can afford to take risks with a new company, and investors who have appreciated the potential of new technologies and growth opportunities.

Then came the corrective second wave, when the shares were sold by investors, unsure of the further rise. When it became clear that the company was developing steadily, the flow of buyers, including speculators, increased, creating the effect of increased traffic intensity. Within three years, Tesla Motors shares rose to $265. The third wave, exactly according to the theory, turned out to be the longest and with gaps.

At this stage, primary investors and speculators began to take profits. The fourth corrective wave lasted up to $180. By this time, the company had gained wide popularity, and the stability of its work and prospects were not in doubt. A massive purchase of shares began and the fifth wave rose to the level of $290.

After reaching the ceiling (fair price), a natural correction began, which amounted to three waves. The situation on the daily chart shows that the correction is ending, as the price has risen above the bottom of wave A.

Results and conclusions: pros and cons

At first glance, Elliot's theory may seem difficult to understand and study. Of course, it makes no sense for amateurs in the market to deal with it. But for professionals on the stock exchange, knowledge and ability to use this tool is simply necessary. It is the only system capable of parsing market movements according to clear rules.

However, there is no mathematical formula by which waves can be calculated. Therefore, wave analysis is a subjective concept and depends on the experience and beliefs of the trader or investor. The wave principle provides some theoretical framework within which various options for the development of the market situation are possible, which, in combination with other methods of analytics, makes the situation on the market clear for the investor. You can get practical experience with us at. If you are still a novice investor, then you can start by attending introductory free webinars.

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- a graphical method of technical analysis that allows you to evaluate the behavior of market players based on the study of price movement waves. The basic postulates of the system were formulated in the mid-thirties of the last century.

The creator of the theory is Ralph Elliott, but the well-known financier Robert Prechter made an equally important contribution to its development and popularization.

Description of Elliott Wave Theory

The basis of Elliott's theory is the observation that each trend consists of certain basic sections (waves) that are constantly repeated.

There are two types of waves in the market – impulsive and corrective.

The former move in the direction of the main trend. The latter, respectively, are corrections to them. The main figure of the wave analysis consists, in fact, of one impulsive and one corrective wave (1-2-3-4-5/ABC). It, in turn, is divided into impulsive and corrective waves of a lower order.

Impulse waves are designated by numbers from 1 to 5, corrective ones - by letters A, B and C. According to Elliott's theory, each trend is a combination of such “fives” and “triples”.

Any trend lasts until five waves are formed, after which it either unfolds, or corrected. In the latter case, three corrective segments are further formed. In total, within the framework of such a cycle of growth-fall, eight waves occur. If there was a reversal, then we observe two impulse waves formed by ten segments.

Let's break down the structure in the above screenshot. Elliott waves 1,3 and 5 are impulsive. They follow the general trend. Waves 2 and 4, respectively, corrective.

In the correctional structure ABC, the situation is somewhat different. Since this structure is included in the general downward wave (correctional), waves A and C are considered impulse here, and wave B, directed upwards, will be corrective.

Elliott Wave Benefit

lies in the fact that such structures can be found both in an uptrend and in a downtrend. In the latter case, we are talking about a mirror image of the bullish structure. That is, all impulse waves 1,3 and 5 will be downward, and 2 and 4 will be upward corrections. Accordingly, in the corrective wave, A and C will be ascending, and B will be descending.

It is important to note that the trend structure does not depend on time scales.

Video - Elliott Waves

Elliott Wave Rules

It is not so difficult to determine by eye five or three areas in any trend. Roughly speaking, anyone who can count to ten can do this. The problem is that two traders analyzing the same chart may very well end up with absolutelyopposing views on its structure. To remove the subjectivity of the visual assessment, the basic rules for the formation of waves were developed. Some of them were created by Elliott himself, some were added later by other theorists.

Let's start by listing the basic rules:

  • The second wave of momentum must not fall to the level of the starting point of the first wave. If this happened, then it is worth questioning the very fact of the development of the trend.
  • The third wave of momentum must exceed the extremum of the first. In addition, it cannot be the shortest of the three impulses if we are talking about large-scale time intervals.
  • The fourth wave of impulse cannot fall below the extremum of the first. This rule is sometimes neglected in real market trading, but in such cases the following condition must be met.
  • The fifth wave of momentum should be above the extremum of the third.

Additional

  • Within-pulse corrections must differ in complexity, nominal size, or shaping time. If there are no differences in at least one of these parameters, the development of the trend should be questioned. There is a possibility that some complex corrective pattern is being formed at the moment.
  • In an impulse structure that meets all the requirements, one of the driving waves must be stretched, that is, it must exceed the other two in nominal size.
  • Three adjacent waves that are part of the impulse must be formed at different time periods.

Based on the above rules, a trader can distinguish between impulse and corrective structures. If the wave meets all requirements, thenit belongs to the first type. If the conditions are not fully met, this is either a corrective structure or an impulse that has not yet formed.

  • If the third wave is larger than the fifth and the first, then the latter will be approximately equal in length. This recommendation may be useful when analyzing the end of the fifth wave. Even if the fifth wave is longer than the third, and the third is longer than the first, we can still calculate the end of the fifth wave. To do this, we need the top of the fourth wave.
  • In the process of observing wave structures, another interesting pattern was revealed - the sizes of corrective waves 2 and 4 can be different, and they alternate from time to time. For example, if the correction in wave 2 was strong enough, then it will be insignificant in wave 4 and vice versa. Using this recommendation, you will be able to roughly calculate the time of correction in the fourth wave. If, for example, there was a significant and rapid correction in the second wave, then in the fourth it will be more calm.
  • Another interesting fact. The completion of the corrective wave ABC should take place at the level of wave 4 (the minimum value).

The theory of Elliott waves in practice begins with the construction of a graph. To solve this problem, it is better to use indicators, we will talk about some of them below. Experts recommend using a standard candlestick chart for analysis, as the most informative and objective. Elliott waves on the chart:

  • The first step is to identify a significant pivot point. To do this, you can use a tool such as a signal line. From the moment of its intersection, the period that we will consider begins.
  • After the pivot point is determined, we should assign names to all waves of interest to us. This is a rather complicated process, the quality of the subsequent analysis directly depends on the correct implementation of it. It is important to remember that an assigned structural designation cannot be subsequently revised unless there are good reasons for doing so. The choice of the time frame is up to the trader, but it is recommended to use segments no longer than thirty monowaves. Next, move marks are placed.
  • At the final stage, the wave is compressed, that is, it is assigned the appropriate structural designation in a similar system of a larger scale. Thus, gradually the entire chart will be assembled into one of the basic Elliott models.

Now the trader sees the formation of the market and can guess how it will develop further.

Elliott waves in practice

The most common reason for trading the Elliott system is the presence of an impulse wave from a trend reversal point. Positions need to be opened in one of the three driving sub-waves, but you should be careful, as there is always a possibility that the selected structure will be part of a larger corrective pattern. After the formation of an impulse wave, it is necessary to wait for the first correction. Its completion is a signal to enter the market.

conservative method

After the movement in the direction of the initial impulse has resumed, a signal line is drawn through the pivot point and the point of the expected completion of the correction. A buy position is opened at the high of the first driving wave. If the price movement has not reached the order and reverses, breaking through the signal line (this happens in the case of a complex correction), you need to make sure that it does not fall below the pivot point. When growth resumes, the line is corrected to a new low.

If the position was opened immediately, you need to continue to follow the signal line. As soon as the price drops and touches it, the deal is closed and a new order is placed at the level of the extreme maximum. You should not be upset if, after touching the "signal", the price curve immediately goes back in the direction of the trend. This is a working moment, which should be treated philosophically, moreover, the resulting loss can still be compensated by a new contract.

Moderate and aggressive methods

The initial conditions for opening a position with a moderate strategy are similar to conservative trading. The difference is that the order is placed at the end point of the corrective wave B. You must always remember that the expected correction may be delayed. Correction of the signal line and exit from the position is carried out according to the same principle as in the previous method. This option is recommended for beginner traders.

With an aggressive strategy, an order is placed only after the breakdown of the signal line. It is believed that the very fact of such an intersection indicates the completion of the structure and the beginning of the formation of a new model.

Elliot Wave Indicators

There is no ideal indicator for building Elliott waves, however, a variety of modifications allows each trader to find the most suitable option for his style. Let's take a look at a few popular tools.

Elliott Wave Oscillator

This is an indicator whose chart displays a histogram (similar to ). The highest peaks correspond to the third driving wave of momentum. It can be used on almost any timeframe, however, too short intervals are not recommended.

When the histogram crosses the zero mark from below / above, a divergence is formed, indicating the completion of the next wave cycle. If at the moment of the first corrective movement the oscillator breaks zero in the opposite direction, the formation of wave 3 should be supported by another divergence. If it is absent, we can assume that the starting point of the model is defined incorrectly.

The fall of the histogram by 30-50% relative to the local extremum indicates the end of the third wave and the beginning of the formation of the second correction segment. Divergence also indicates the completion of the process of the formation of the fifth wave - the growth / fall of the price chart is accompanied by a decrease / increase in the bars.

According to the first rule of trading, first you need to wait for confirmation of the final zero crossing. If the trend is up, the histogram of the indicator is displayed above the middle level, if it is down, it is below the middle level. The position is entered after the first divergence. A rising price and a falling oscillator signal a sell, while a reverse divergence signals a buy. You can enter after the corrective movement drops / rises by about a third relative to the first impulse wave. Stop loss is usually placed at the extreme level and the trade is closed immediately after the formation of a new divergence.

Elliott Wave Prophet and Watl

The Wave Prophet indicator is quite popular among Elliott wave traders. With its help, you can not only see completed movements, but also predict the future direction of the price. The wave model on the chart is built automatically. If a trader believes that the initial conditions are determined by the system erroneously, he can always set them himself.

Watl is a handy indicator that not only visually displays wave patterns, but also draws trend lines. The user can see the trends of different timeframes and a forecast of the future trend. As mentioned earlier, the optimal indicator for the implementation of Elliott's theory has not yet been invented. The listed tools can be considered the most effective at the moment, but they are still far from perfect. However, this in no way detracts from their merits and benefits for traders.

Criticism of Elliott Wave Analysis

Elliott Waves are often criticized. Many opponents of this method believe that there is little practical benefit from it, since it is rather subjective. Moreover, there are opinions of real practicing traders that this type of market forecasting is more likely to cause losses than profits.

What exactly are the critics of wave analysis paying attention to?

First of all, they note that price movements cannot be predicted using such a framework. The price may significantly deviate from the drawn waves. In addition, there is a subjective factor. After all, waves, like other types of graphical patterns, can be seen literally in any formation, if desired.

Some critics note that wave analysis is a method with a lot of nuances that are not clear to most traders. For example, it is not always possible to determine in the process of trading where the waves begin and where they end.

Critics also point out that the best Elliott waves can only be identified on historical charts. As for working with this theory in practice, it is practically impossible due to a large number of factors.

Video about motive and corrective Elliot waves

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The market is changeable. However, its variability can be predicted. And if you can predict, then you can (and should) earn. Ask how? There are many technical analysis tools that allow you to determine the patterns of market changes. One of the most effective is the Elliott wave theory.

It's simple: there are eight market waves that are constantly repeated, which allows us to earn on changes in the value of the instrument. Do you want to learn more about the Elliott theory in just a few steps and use it to make a profit in the foreign exchange market?

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Prerequisites for the appearance of the theory

Elliott Wave Theory- the first serious work in the field price chart analysis after the Dow theory. As a basis, the statement is taken that the whole history repeats itself in one form or another and the so-called Elliott waves are formed. Just as any social or economic events have the same development scenario, in the same way, structures can be distinguished on the chart like two drops of water similar to each other. "History repeats itself" is one of the foundations of Dow's work that Elliott developed to a complete analytical system. The developer himself never managed to make a fortune on his offspring, but there is indisputable evidence that Ralph Elliott predicted events with amazing accuracy, and he did this not only regarding the price, but also the possible start and end time of the movement in the market.

Elliott waves are an ordered system of rules that describe the behavior of the main object of study - wave motion. It means some directional chart shift up or down. The relationship between the individual movements leads to a complication of the structure of the model, and then the same rules begin to operate, but only in relation to a larger wave. Thus, a thing that is not entirely obvious at first glance becomes clear - the entire graph is highly fractal, self-similar, it can decompose into components similar to each other from weekly movements to every second tick fluctuations.

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The nature of vibrations

At first glance, the trading process is absolutely chaotic, especially if you watch it on a minute time frame. However, even on it, Elliott waves can be distinguished. They are made up of constantly shifting balance of supply and demand, and this happens cyclically, not necessarily due to a change in market conditions, but at least because someone fixes profits, having no idea what will happen next and thus creates a movement in the opposite direction. This whole process of forming new Elliott waves can take from minutes to months, depending on the scale of the money movement involved in the formation. The author introduced a special system for labeling, which provides for the variability of designations for separating fluctuations by their magnitude and length - from a global supercycle in two Elliott waves to hourly ones. It makes little sense to mark up on smaller periods, since the effect of market noise is too strong, which some attribute to automated algorithmic systems.

So, Elliott waves consist of two types - impulse waves and corrections. They differ as follows: in an impulse wave five components, in the correction only three. The logical question why exactly 5 and 3 can be answered if you try to choose the simplest combination of the same components so as to distinguish one from the other and none of them was an integral part of the other. So it turns out that this number pair is the simplest solution. The following picture shows the decomposition of such a 5-3 cycle into its constituent parts with a gradual reduction in scale.

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Basic structures

impulses

This is a type of Elliott wave, consisting of 5 oscillations, three of which are directed in the same direction. In essence momentum is the main driving force market within the trend. According to statistics, it turns out that less than a third of the total market time falls on impulse movements. But on the other hand, at this time, the main price shifts occur, while events are developing quite dynamically, the intensity of movement is many times higher than that in a calm time for the market. The classic type of impulse Elliott wave is characterized by the following features:

  1. First, third and fifth movements directed to one side;
  2. The second and fourth are corrective(kickbacks) and directed in the opposite direction;
  3. fourth movement does not enter price territory second;
  4. The third movement in the Elliott wave can't be the shortest among trend ones (1, 3 and 5).

These simple rules make it possible to identify such movements on the chart almost without problems. However, there is a variety called diagonal, which is slightly different from the usual impulse. In this case, Elliott waves violate the third rule, and the fourth wave intersects with the second, but the third wave still cannot be the shortest. Wherein it is possible to draw forming lines, which will converge and form a triangle, as shown in the following plot example.

The diagonal can form or at the beginning of the movement, that is, in the first wave, either at the end- in the fifth. It is also not uncommon for formation at the end of wave C, we will consider this in the section of corrections. Due to the fact that a lot of people decided to interpret the theory of marking up on Elliott waves in their own way, and at the same time they were published, and some even translated the original book from English, in some sources you can find the name “ terminal impulse". This is the name of the same diagonal variation of the Elliott wave at the end of a trend, in which the first wave is larger than the third, and the third is larger than the fifth, and there is an intersection of the second and fourth. Such impulses are followed by a fairly deep rollback, from 50% to 60% of the entire range of the impulse. The main property of such impulses is that they made up of triplets, so the structure looks like 3-3-3-3-3 , but not 5-3-5-3-5 , as in the usual type of impulsive Elliott waves. The final diagonal almost always signals a reversal in the medium term, and if it forms after a long dynamic movement, then the reversal can be quite fast and then a deep pullback will follow.

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Corrections

The corrective movement is from three waves, which in different combinations give corrective Elliott waves. After the trend movement in the market, there is a lull, which is accompanied by profit-taking, entries into the market of those who assume the end of the trend reversal, as well as those who are simply engaged in short-term trading and trades any relatively large move in any direction. Corrections are much longer than impulses, with the longest usually being the second wave in this combination. If in an impulse the composite Elliott waves are usually denoted by numbers from 1 to 5, then in corrections they will be waves A, B and C. First and third waves have signs of impulses of a smaller order, that is, they consist of 5 components, wave B has a structure of three waves. it the most difficult wave to mark, since it is itself corrective in the corrective model. Trading during a rollback is not recommended, the pattern can be very complex and difficult to analyze, which can result in a series of losses.

  • flat correction

    The most common type of correction and the most common type of corrective Elliott wave. The distinguishing feature is the structure consisting of three waves, the first of which does not consist of five, but of three, that is, the general view is obtained 3-3-5 . Exactly on the first wave in the rollback, you can judge what form the whole structure will take. It got the name flat because the waves have a comparable size. For example, wave B in the plane is usually at least eighty percent from the Elliott wave A, and sometimes crosses the level of its beginning (in this case, an irregular correction is obtained). Wave C reaches or almost reaches the level of wave A, in rare cases it can significantly exceed it. That is need to navigate that two of the three Elliott waves - A and B or B and C will be of comparable size. In the ideal case, they are all approximately equal and form a “flag” graphic pattern, which implies a continuation of the trend.

    it the easiest option the pullback movement of the corrective Elliott wave, it is easy to identify and build trading plans in accordance with the form it takes. If the first two waves are equal, then the market can be entered after the extremum formed after wave B is broken. In this case, a pending order is placed and there is no need to look out for the end of wave C. For those who are well versed and understand how to build an Elliott wave of a smaller scale, you can try to catch a reversal after C forms in the form of a five-wave. A separate type of flat corrections is running plane– waves consistently exceed the range of the beginning of the previous one, but truncation (failure) is possible in wave C.

  • Zigzag

    The second common type of corrective Elliott wave, which has a structure of two five-wave movements and one three-wave (5-3-5). Such rollbacks are quite deep and reach a size of over 50 percent of the previous impulse. In the model itself, pullbacks are not as large as in the flat and rarely the size of wave B exceeds 60% of the size of wave A. The last wave C can be approximately equal to wave A, but there are also options with a range from 60% to 160% of the Elliott wave A.

    You can identify a zigzag at an early stage by the good visual impulsive nature of the first component of its wave, as well as the wave B that does not reach the mark of the beginning of wave A. The deeper the rollback in B, the higher the probability that wave C will turn out with an extension, while it can reach values ​​and 260%. At the end of the movement and the beginning of the correction, such Elliott waves can form the well-known head and shoulders pattern, in which impulse waves 3,4 and 5 form the left half, and corrective A, B and C complete the right half. The same applies to the bearish option – inverted gui.

  • triangles

    Enough rare kind of waves Elliott, relating to correction, consisting of five movements, each of which is corrective, that is, it consists of three waves of a smaller order. Final structure triangle is represented as 3-3-3-3-3 . Elliott Wave trading implies strictly following the rules, therefore, it is not necessary to consider each tapering structure as a triangle, since all waves must have zigzag look only in this case can it be uniquely identified. You can assume this type of correction after the third wave marks its triple structure - neither in a flat correction, nor in a zigzag, wave C can be a triple, respectively, it will be a triangle or a more complex correction with a large wave B. This option will be canceled if you continue formation of an Elliott wave from triples and narrowing the range of waves.

    In rare cases, the Elliott triangular wave may continue to develop such a structure, and the result will be a view no longer of five movements, but of nine. In such a situation, wave e takes the form of a triangle, that is, the range should continue to narrow. As a rule, this occurs on not very large time frames, one of the latest examples is the silver chart. Also, intermediate Elliott waves in correction - B can consist of triangles. The most important thing to know - the triangle is always the penultimate movement in the structure, whether it is an impulse and a triangle in the fourth wave, or a correction and a triangle in wave B. It is always followed by a movement directed along local trend.

  • Complex corrections

    They are a type of Elliott wave, consisting of several simple corrections of different types, but of approximately the same scale. It could be combining a plane and a zigzag, plane and triangle, zigzag with a plane and a triangle. This combination is denoted by the letters W, X and Y. When very complex and large-scale structures are formed, a combination of Elliott waves is obtained, consisting of W, X, Y, XX and Z. That is, another connecting wave XX appears. In such combinations, the main thing is to identify the main areas that look like independent models in order to assume the further development of the situation and the possible continuation of this form of movement. The only purpose of this should be find the end point of this shape, composed of Elliott waves, since trade corrections basically Not recommended not to mention such large varieties.

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Using Fibonacci Ratios

Elliott waves interconnected certain ratios. This was noticed by the author on the example of not only rollbacks, but the relationship between the driving waves. Surprising is the fact that these proportions are based on “ golden ratio”, the same value can be obtained if we take the limit of the ratio between the next member of the Fibonacci sequence and the previous one with an infinite extension. This results in a value of 0.618 or 61.8%. All the rest of the main ones are obtained by taking this ratio sequentially from itself, dividing the resulting parts by itself, and so on. The main possible dimensions of the Elliott wave are: 23.6; 38.2; 61.8; 76.4; 78.6; 161.8; 261.8. These are the basic values ​​that can be used to calculate the possible size of a rollback, as well as the potential target of the current impulse movement. The second wave is characterized by rollbacks ranging from 23.6% to 76.4%, there are deeper ones, but this rarely happens. The fourth wave is usually guided by a rollback to the third, therefore, the ratios must be looked at precisely between them, and not the entire movement, starting from the first. In the fourth wave, the rollback is usually does not exceed 38.2% from the third. The first and fifth Elliott waves are usually approximately equal, while the third is often lengthened and can be from 127% to 261% of the first wave, in rare cases 361% and even 423%. Because the structure Elliott waves fractal, these methods are applicable on absolutely any scale, up to a five-minute chart.

Auxiliary tools

Some indicators can be used as helpers in identifying and navigating current Elliott Waves. Moving averages on a four-hour timeframe with a period of more than 30 show the end of corrections quite well, as they act as dynamic support for the price. The specific value must be selected depending on the analyzed instrument and the selected period. Known popular on the hour frame enjoy movings with a period of 150, 200 and 250. The same applies to the daily charts, but they rarely intersect. However, this kind of support makes sense to take into account.

The second good tool for determining the end of a major Elliott wave is oscillators. Typical signals are divergence and convergence, which are used to pulse completion confirmation. They are formed between the third and fifth waves, but in a correction they can signal that wave C has come to an end. As a rule, the MACD indicator is used for this, it shows reversals very accurately and rarely gives false signals. Applicable for periods older than half an hour, but you need to understand that the smaller the time frame, the more likely the formation of triple divergences and non-working signals.

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Conclusion

In general, the whole theory of building each of the Elliott waves is quite natural and has been used for quite a long time. Although it was designed for the stock market, also successfully used in the foreign exchange. Robert Prechter, one of the main current ideologues and followers of Elliott himself, claims that modern margin markets with automated trading systems not at all do not affect the performance of the models, but only slightly shift the statistical data towards more volatility structures. Nevertheless, despite the rather strict rules by which Elliott waves are built, there is always some markup variability, and whether it will turn out right or not can be said only after the end of the formation of the structure, here experience and long-term monitoring of the price is very important with attempts to analyze and predict future events.

In a simple and accessible form, give the basics of the basic course on wave analysis by Ralph Elliott- the most expensive in all kinds of "Forex education" courses and the most difficult of all sections of the technical analysis of trading.

We have this material of the 11th grade of the School of Beginner Traders at the Academy Masterforex-V on a closed forum where learning starts from scratch - a basic school course, then Elliott wave analysis models and their interpretations of the MF are used as hints on the Academy's closed forum.

To understand the essence of Elliott wave analysis, you need to realize 3 things, without which it will be difficult for you to become an experienced professional trader who earns trading "for a living":

Below is the Elliott wave analysis model. It is unlikely that you will remember them from the first and even from the second time, but just try to determine for yourself where:

  • trend - the momentum on which you need to open deals;
  • and where is the correction, understanding that this knowledge is an obligatory PART of your future professionalism and success in Forex.

Elliott wave theory gives an algorithm for the movement of Forex currency pairs

A trend (impulse waves) has a 5-wave structure (waves are denoted by numbers 1, 2, 3, 4, 5, A, B, C) and consists of impulse and correction waves.

  1. Impulse waves 1, 3, 5:
    • longer correction waves;
    • show the direction of the trend.
  2. Correction waves:
    • 2nd and 4th waves, each of which has a 3-wave structure (a-b-c) and shows the direction opposite to the current trend.

Rice. 2. Pattern of an uptrend (bullish) trend

The Importance of Elliott Waves for a Forex Trader

  1. To follow the trend, you need to see the DIRECTION of the trend - impulse waves that are longer than correction waves.
  2. Wave analysis allows you to see at what point of movement currency pairs are in terms of the structure of the wave movement (whether the trend starts or is already ending).
  3. The goals of the movement of the trend waves (if the top of the 1st wave is broken, then the 3rd wave will reach at least 162%).

Sub-wave structure on a trend

  1. The 1st, 3rd, 5th impulse waves have a 5-wave structure of their subwaves.
  2. Correction waves (2 and 4) have a 3-wave structure and are designated A-B-C.

Rice. 3. Wave structure of momentum and correction
Rice. 4. Structure of subwaves

Characteristics of each wave

  • Wave 2 = 0.382-0.618 of the length of the 1st wave.
  • Wave 3 = 1.618-2.618 of the length of the 1st wave.
  • Wave 4 = 0.382-0.5 of the length of the 3rd wave.
  • Wave 5 = 0.382-0.618 of the length of the 3rd wave (5th wave = 1.618x1 wave if extended).
  • Wave A = 1, 0.618-0.5 of wave 5.
  • Wave B = 0.382-0.5 of wave A.
  • Wave C = 1.618 or 0.618-0.5 of wave A.
  • In the 2nd wave, A = B = C, or A = 0.618 × 1 wave, B = 0.618 × A wave, C = 0.618 × B wave, that is, a converging triangle.
  • In the 4th wave, A=C, or A=0.618×3 wave, B=0.618×A wave, C=0.618 (or 1.618)×B wave.
  • In the 4th wave, B \u003d 0.236 × A wave.

Waves and Slanted Trend Channels

  • the top of the 1st and 3rd waves;

This will allow you to see

  • top of the future 5th wave.

being drawn

  • then after the end of the 4th wave - the final channel (Final Channel).

Rice. 5. Temporary inclined channel
Rice. 6. Final inclined channel

Elongated and truncated waves

  • the top of the 1st and 3rd waves;
  • parallel channel from the bottom of the 2nd wave.

This will allow you to see

  • the expected level of rollback of the 4th wave;
  • top of the future 5th wave.

being drawn

  • first the Temporary Channel;
  • then after the end of the 4th wave - the Final Channel (Final Channel).

Rice. 7. Extended 3rd wave Rice. 8. Varieties of extensions

Questions of the next level of education (Masterforex-V Academies)

  • Why can the number of elongated waves in an impulse be 5, 9, 13... (call the numbers below)?
  • Why in a correction the number of extended waves can be 3, 7, 11... (call the numbers below)?
  • What formula do the classics of wave analysis have for counting sub-waves of lengthening in an impulse and correction?
  • If the number of sub-waves in the lengthening is 15 and 17 - which of them is the impulse wave, and which is the correction of the older one?

truncated waves

The 5th truncated wave does not break through the peak of the 3rd wave. Criteria for a truncated 5th wave:

  • has a 5-wave structure;
  • a truncation usually occurs after an extremely strong 3rd wave.

Rice. 9. Truncated fifth wave
Rice. 10. Bullish and Bearish Truncation

Fibonacci levels and Elliott waves

The Fibonacci sequence is numbers in which each subsequent digit is equal to the sum of the previous two 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.

Fibonacci Levels (Golden Ratio)

  • After the first few numbers in the sequence, the ratio of any number to the next highest is about 0.618 to 1, and to the next lowest is about 1.618 to 1.
  • The ratio between numbers one after the other in the sequence is approximately 0.382, which is the inverse of 2.618 (1:2.618*).

This ratio is used in wave analysis to calculate the goals of the movement of impulse and retracement waves.

  1. Momentum wave = Fibonacci extension levels (162-362% of wave 1).
  2. Correction wave = 23-76% of the previous wave.

Respectively,


Alternative-3 force majeure = cancellation of the 5-wave trend (additional wave criteria). Drawings.


right


Rice. 16. The third wave of the correct length

Significance for the trader of the axioms of wave analysis and force majeure that cancels the momentum

  1. If the impulse is canceled there is no continuation of the trend.
  2. The currency will not stand still (if it cannot go up, then it will go down).
  3. The Masterforex-V Trading Academy daily provides both versions of the trading plan with clear criteria for switching from one option to another.

Typical mistakes of traders


Elliott wave levels

Essence:

  • the market moves according to the laws of the wave theory of several wave levels;
  • one wave level = 5 waves of impulse and 3 waves of correction;
  • a full cycle of 5 waves of momentum and the 3rd wave of correction is just one wave of a higher level;
  • this wave of a higher level is just a sub-wave of the next level.

Prechter gives 8 levels for numbering waves using the following "near Elliott" symbols.


Tab. 1 Classification of wave levels according to Prechter

Thus, according to Prechter's calculations (a continuation of the logic of Elliott's calculations) since 1932, the rise of the US stock market is in the 5th wave of the 3rd (main) level.

  • 1932-1937 - the first wave of the main level;
  • 1937-1942 - the second wave of the main level;
  • 1942-1966 - the third wave of the main level;
  • 1966-1974 - the fourth wave of the main level;
  • 1974-19?? - the fifth wave of the main level.
Rice. 21. Prechter Supercycle

An example of the designation of waves by classical waveforms and their interpretation


Rice. 22. Classical wave counting of the market movement

Drawing interpretation:

  • 1st wave of intermediate level;
  • consists of 5 waves of the secondary level (1), (2), (3), (4), (5);
  • minute level shows waves 1, 2, 3, 4, 5 a-b-c.

Structure of waves of several wave levels

Rice. 23. Ratio of wave levels

Diagonal triangles as special 1st and 5th impulse waves

Special wave formations in waves of impulse of the 1st or 5th wave, in which the 4th sub-wave (of a shallower level) enters the zone of the 1st wave.


Signs of a trend reversal in terms of wave analysis

  1. Final diagonal triangle.
  2. Extended 5th wave.
  3. Truncated 5th wave.

Correction models and principles of their alternation

The 2nd and 4th waves are corrective.


Rice. 29. Corrective waves in a five-wave pattern

Movement on these waves takes the form of the following correction patterns:

  1. Zigzags (5-3-5) (Zigzags), or a simple (zigzag) correction.
  2. Planes (3-3-5) (Flats), or flat (flat) correction.
  3. Triangles (3-3-3-3-3) (Triangles), or Triangular correction.
  4. Double triples and triple triples (combined structures).
  5. Wrong correction.

Classic wave analysis correction models

Simple (zigzag) correction (sub-wave structure 5-3-5).


Rice. 30. Corrective figure "Zigzag"

Its variety is double zigzag.


Rice. 31. Corrective figure "Double Zigzag"

Flat (flat) correction (sub-wave structure 3-3-5)

It differs from the previous model (zigzag) in that:

  • the sequence of its subwaves is 3-3-5;
  • has the shape of a flat (flat) instead of a directional movement, as in a zigzag correction;
  • usually precede or follow wave lengthenings.

Rice. 32. Correction figure "Plane"

Triangular Correction, or Horizontal Triangles

  • 3-3-3-3-3 and are marked a-b-c-d-e.

Rice. 33. Horizontal Triangle

Double and triple triplets

Rice. 34. Double Three Rice. 35. Triple Three

There are two types of triangles: converging and diverging.

Converging triangle


Rice. 36. Converging Triangle Rice. 37. Converging Triangle
Rice. 38. Converging triangle in the fourth wave

Divergent triangle The principle of alternating correction patterns in depth and structure on the 2nd and 4th wave

The essence of the alternation is that if the 2nd wave is a sharp correction, then the 4th wave will be a side correction and vice versa.


Rice. 42. Simple 2nd wave and complex 4th
Rice. 43. Simple second wave and complex 4th

Brief conclusions of Masterforex-V about Elliott wave analysis

  1. This is the brief essence (basics) of the Elliott wave analysis, set out in hundreds of pages of books by Prechter, Frost, Fisher, Vozny, Balan and other classic wavers.
  2. This material, in one form or another, is given in expensive courses at Dealing Centers and brokerage campaigns as the highest stage of Forex technical analysis.
  3. This material is presented in Masterforex-V Academy as initial Forex analysis and education stage (11th grade of the School for Beginner Traders at the Masterforex-V Academy).
  4. At the closed forum of the Academy (the theory of the Masterforex-V trading system, other TS and DAILY practice of applying the theory to specific trades) - numerous examples of methodological and practical errors of the classic wave analysis of trading, including examples as masters of wave analysis for 6 working days 5 (!) times redo their previous wave analysis. So, currency pairs absolutely go NOT in this way and NOT where they are prescribed by the "laws" of wave analysis in the interpretation of a particular master (D. Vozny and others).
  5. In the following chapters of the book, we will try to reach the METHODOLOGICAL shortcomings of specific methods of Elliott wave analysis, the solution of specific unsolved mysteries of the classic Elliott wave analysis in the Masterforex-V trading system, which, I hope, will help traders in Forex.