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The Elliott Wave Principle
The Elliott Wave Principle
wave principle. Much of what you will see here is described in detail in the
book, Elliott Wave Principle, by Frost and Prechter. I am not suggesting that
you buy this book, but that's where I found the patterns.
Ralph Nelson Elliott, in the 1930s, discovered what is now called the Elliott Wave
Principle. He uncovered thirteen basic patterns or waves that describe how markets
trend and reverse on a repetitive basis. By linking the patterns together in different
combinations, you can create larger versions of the patterns. In this way, the method is
said to be fractal. Each wave is composed of smaller waves, like the tide is composed
of advancing and receding waves and those waves are composed of ripples. The
technique was meant to forecast turning points in the market averages.
The following Elliott wave patterns are listed alphabetically, followed by a glossary of
terms used on these pages.
8 wave cycle
Basic motive phase
Corrective phase
Flat (3-3-5)
Flat, expanded
Flat, running
Triangle, ascending
Triangle, descending
Triangle, ending diagonal (wedges)
Triangle, leading diagonal (wedges)
Triangle, reverse symmetrical (broadening)
Triangle, running
Triangle, symmetrical
Truncation
Wave extension, first
Wave extension, third
Wave extension, fifth
Wave extension, unknown
Zigzag
Zigzag, double
See Also
8 wave cycle
The following page describes the basic pattern of the Elliott wave principle, how price
moves not in a straight line but in a series of rises and retracements.
Except for unusual circumstances, price moves in waves and not in a straight-
line run. These waves are like the tide coming in. Price advances and recedes,
advances a bit more and recedes, slowly creeping up the shore. The outgoing
tide shows the wave advance not as far as previous waves, and withdrawing further.
The figure on the right is a picture of the wave moving up the shoreline as high tide
approaches. The water rises in a series of advancing waves followed by receding ones.
The motive phase takes the shape of a five wave structure (1 through 5) followed by
the corrective phase which has three waves (ABC).
The motive phase is composed of three advancing waves, 1, 3, and 5 and counter
trend waves 2 and 4. Following the motive wave comes the corrective phase. It shows
two receding waves, A and C, with a counter trend wave between, B. The series, 1
through 5 and A through C can be repeated to show how the tide comes in, or price
advances up the chart.
If you were to zoom in on waves 1 and 2, you would see the same 1 through 5 and
ABC combination. You can say the same about waves 3 and 4, 5 and A, B and C
(with the structure reversed). In this manner, the cycle is fractal, meaning the closer
you zoom in, the more motive and corrective phase combinations you see. If you were
to zoom out, say look at the structure from across the room or from the other side of
your yard, the 1 through 5 and ABC combination would take the shape of waves 1 and
2.
Motive waves do not always point up and corrective waves do not always
point down. If you were to use a microscope to look at waves A-B from the
above chart (not the chart to the right), you would see a five wave structure
heading lower (waves 1 through 5) followed by a three wave, ABC, correction. I show
this in the chart to the right.
Frost and Prechter describe this movement best when they write, "...the essential
underlying tendency of the Wave principle is that action in the same direction as the
one larger trend develops in five waves, while reaction against the one larger trend
develops in three waves, at all degrees of trend." That is an important statement. It is
not entirely accurate, but I like to think of it this way: five waves align with the
primary trend and the corrective phase is the counter trend move. The primary trend
can be up (bullish) or down (bearish).
Trends that align with the primary trend (wave of higher degree) form in 5 waves.
Counter trends develop in 3 waves. So if you expect price to continue rising, look for
5 waves.
The motive phase is composed of five waves, three advancing (1, 3, 5) and two
counter trend waves, 2 and 4.
The corrective phase is composed of three waves, two receding (A and C) and
one counter trend wave, B.
Motive waves can head up or down.
Corrective waves can head up or down.
The motive phase aligns with the larger trend.
The corrective phase is a counter trend move against the larger trend.
Wave 2 never moves beyond the start of wave 1.
Wave 3 is never the shortest wave.
Wave 4 never overlaps wave 1.
This is an observation: one of the waves, 1, 3, or 5, will often (but not always)
be much longer (extended) than the other two.
-- Thomas Bulkowski