ElLiot Waves

There are mainly two types of waves

1. Motive Wave
2. Corrective Wave

Wave Principles
 Wave 2 never traces 100% of wave 1
 Wave 4 never enters the price territory of wave 1
 Wave 3 can never be the shortest in comparison with impulse wave 1 and wave 5

 Wave 1,3,5 are called as Impulse waves, Actionary wave

 Wave 2, 4 are called as Corrective waves
 Wave 1, 3, 5 can be further subdivided into 1-2-3-4-5, and wave 2, and wave can be
sub-divided into A-B-C

Wave degrees are classified into

 Primary—Monthly
 Intermediate—Weekly
 Minor—Daily
1. Motive Waves
1.1 Impulse Waves
a. Extensions
i. Elongated impulse wave
ii. Appears in wave 1,3,5
iii. Often seen in wave 3 of stock market
iv. Often seen in wave 5 of commodity market

b. Truncations
i. Wave 5 does not exceed end of wave 3
ii. Contains all sub-waves 1-2-3-4-5 in wave 5
iii. Often occurs after a strong wave3

2. Diagonal Triangles
a. Typically occur in wave 5 or wave c
i. Sometimes sub-wave 5, does a throw-over or throw-under
b. Normally has wedge shape. The waves occur between two converging lines
c. Wave 4 always moves into the price territory of wave 1
d. Wave 1, 3 and 5 are composed of three sub-waves not five
e. Found at termination points of larger pattern
f. Indicate exhaustion of larger pattern
g. Once the diagonal triangle ends, it results in a swift move in the opposite
direction, retracing the entire diagonal triangle

2. Corrective Waves
Wave 2 and wave 4 are corrective ways. Also Wave A, and wave C

1.2 Simple Corrections

Zigzag ( A-B-C::5-3-5 Structure)
 Has a sharp look
 Normally occurs in the second wave of an impulse wave
 Normally does deep retracement

1.3 Complex Corrections

1. Flat (A-B-C:: 3-3-5 NOT 5-3-5)
a. Regular Flat
i. Wave B terminates near the origin of wave A
ii. Wave C terminates near the termination point of wave A
b. Expanded Flat
i. Wave B terminates well beyond the origin of wave A
ii. Wave C terminates beyond the termination point of wave A
2. Triangle (A-B-C-D-E::3-3-3-3-3 Structure)
a. Bounced by trend lines that connect A,C,E and B,D
b. Trend lines could be converging or expanding
c. Triangles are very important because, when the triangle ends, the next
actionary wave is in the direction of the main wave
 d. Sometimes, wave E (ABCDE) could overshoot or undershoot the AC
line
e. When you identify a triangle like structure, we can safely assume that
we are in corrective phase. The next move can be expected in the
direction of higher degree
3. Combination
a. More than one corrective structure linked by another corrective structure
called “X” Wave
b. X wave is a 3 wave structure
c. It links any two other corrective structures like flat, zig-zag, triangle

Corrective Wave Summary

Pattern A B C D E Shape / look Position
Zigzag 5 3 5 Sharp Wave 2
Flat 3 3 5 Sideways Wave 4
Triangle 3 3 3 3 3 Sideways Wave 4
Combination Sideways Wave 4

1.4 How to Start Counting the Waves

1 Markets are continuous. They do not have a beginning or end. Therefore
start counting from a significant top or bottom
2 As markets move and prices take shape, one needs to be flexible to change
the counts and position the trade accordingly
3 Impulse waves
a. Have 5 wave structures
b. Have energetic personality
c. Covers a lot of ground in short time
d. Angle of impulse wave is steep
4 Corrective waves
a. Have sluggish personality
b. Slow moving affairs that takes days and weeks to end

1.5 Wave Characteristics

Some of the characteristics of Impulsive waves are
1 Equality
a. Two of the motive waves in 5 wave structure will tend to equality. Eg. If wave
3 is extended, then wave 1 and wave 5 will tend towards equality

2 Alternation
a. If wave 2 is a sharp correction (Zig-Zag), expect wave 4 to be a sideways
correction (triangle, flat or combination)
b. Sharp corrections never include a new price extreme. Eg Zigzag
c. Sideways correction include a new price extreme. Eg flat triangles
d. Diagonal triangles do not display alternation in sub-wave 2 & 4
e. If wave A begins with flat A-B-C then expect wave B to be zigzag a-b-c and
vice-versa
 f. If large correction begins with a simple a-b-c zig-zag then wave B will stretch
out into a more complex a-b-c zigzag
3 Depth of Correction
a. Typically 4th wave corrections tend to register their retracement within the
span of travel of one previous 4th wave of one lesser degree
b. Mostly wave 4 ends near the area of termination point of previous 4th wave of
one less degree
4 Channeling
a. A parallel trend channel typically marks the upper and lower boundaries of
impulse waves and zigzag corrective waves

b. Channeling to find targets

i. Join the higher lows of correction waves
ii. Draw parallel line starting from the higher top between the two
corrections

c. Throw over in channeling

i. If wave 4 does a throw over, wave 5 does a throwover too

d. Channeling in Zigzag correction

i. We need three points
1. Origin of Wave A
2. Termination point of Wave B
3. Termination point of Wave A
ii. Join the origin of wave A and termination point of wave B
iii. Then join a parallel line, starting from the termination point of wave C
 iv.

5 Volume
a. For waves <Primary degree
i. 3rd wave volume is >5th wave volume
ii. IF 5th wave volume >=3rd wave volume, then there would be a 5th wave
extension
b. For waves > Primary Degree
i. Typically higher volumes in 5th wave
ii. All time high volumes at terminal points of Bull market
c. Volume often spikes at the throw over point of a parallel trend channel line
or a diagonal triangle resistance line
d. Volume contracts in corrective waves

6 Post-triangle Thrust Measurement

a. Used to find target on breakout of a triangle
b. Extend the AC & BD trend line until they connect to the beginning of A wave
c. Add the distance to the termination point of Wave E
7 Fibonacci Relationships
a. Elliot waves, both impulses and corrections adhere to specific Fibonacci
proportions, such as 0.382, 0.5, 0.618
b. Golden ratio: 0.618
c. Seen in both amplitude and time

8 Fibonacci Relationships
a. Measurement of wave 1 is used to estimate length of other waves
b. These measurements are not rules, only guidelines
i. Wave 2 is 50% or 61.8% of wave 1
ii. Wave 3 is 1.62*wave1 or 2.62* wave 1, or 4.25*wave1
iii. Wave 4 is 23.6% or 38.2% of wave 3(75% probability)
1. Sometimes 50 to 62% of wave3 ( 25% probability)
iv. Wave5:
1. If wave 3 is greater than 1.62 times wave 1, equal to wave1 or
1.62 times * wave 1 or 2.62* wave 1
2. If wave 3 is smaller than 1.62 times wave 1then
a. Based on the entire length of beginning of wave 1 to top
of wave 3
b. Wave 5 will most likelyl be extended
c. 0.62 times OR 1time OR 1.62 times the length

9 Fibonacci Relationship—Corrective Wave

a. ZigZag or simple correction
i. Wave B –Usually 50% of wave A
ii. Wave B—May not exceed 78% of wave A
iii. Wave C – Either equals Wave A or 1.62% or 2.62% times wave A
2 Trading Concepts
Our focus is to trade the below
1. 3rd wave: 3rd of first, 3rd of second, 3rd of third, 3rd of fourth and 3rd of fifth
2. 5th wave: 5th of first, 5th of second, 5th of third, 5th of fourth and 5th of fifth
3. A wave: Especially after EDT (Ending diagonal triangle)—develop the ability to
identify the end of wave 4
4. C wave: Develop the ability to identify end of B wave

Why Eliot waves

1. They help in identifying the maturity of the trend(End of 5th or end of C)
2. They help in identifying what is going on. i.e motive or corrective
3. They help in staying in the trade. Use of trend based Fib tool for 3rd wave, 5th wave
and C wave targets

Marriage of Eliot wave with Technical Analysis

1. We should not plot Eliot waves as the first step in technical analysis
2. Price action will unfold our wave count, as price gets printed in the chart, it will prove
if our count is correct of wrong. If our count is proven wrong by price, then we must
be flexible to re-adjust our wave count

MACD
1. MACD peaks at the end of 3rd wave and sometimes in 3rd of 3rd
2. In rare scenarios we also find MACD peak at the end of 5th wave
3. MACD comes to zero line at the end 4th wave
4. Note: MACD comes to zero line, does not mean the end of 4th wave

Looking for Divergence

1. First preference—RSI
2. Second preference—MACD and MACD histogram
3. Third preference—Stochastic
4. Note: IF you find divergence in any of the indicators, we can consider it

Bollinger Bands with Elliot waves

1. Uptrend in outperformers
a. In an outperformer, when there is an uptrend, impulse waves challenge the
upper BB
b. Whenever price is seen inside a BB, corrective wave is going on
c. When BB becomes flat, then complex correction is going on
d. When corrective action waves are going on, they can end at
i. Median or BB
ii. Lower BB ( BKP or Lower BB challenge fail)
Note: A small correction in higher timeframe can look like a big impulse in smaller time
frame. Hence it is important to keep higher time frames in check

2. Downtrend in Underperformers
a. In an underperformer when there is a downtrend, impulse waves are the one’s
which challenge the lower BB
b. Whenever price is seen inside the BB, then correction is going on
c. When BB becomes flat, complex correction is going on
 d. When corrective waves are going on they end at
i. Median of BB or
ii. Upper BB ( BKT or upper BB challenge fail)
Note: A small correction in higher timeframe can look like a big impulse in smaller time
frame. Hence it is important to keep higher time frames in check

How to conclude a Zig-Zag correction is over and new impulse has begun

Uptrend: A-B-C Zig-Zag in downward direction

Step 1: Plot a horizontal line at the low of wave A
Step 2: Connect the origin point of Wave A & Ending point of Wave B with an angular
resistance line
Step 3: Plot a horizontal line at the high of wave B

When all the lines are broken, we can conclude that a new impulse has begun
Downtrend: A-B-C Zig-Zag in downward direction
1. Step1: Plot a horizontal line at the low of Wave A
2. Step2: Connect the origin point of wave A & Ending of wave B with an angular
support line
3. Step 3: Plot a horizontal line at the low of wave B
4. When all the lines are broken, we can consider a new impulse has begun

Important Points
 Use Eliot waves in highly liquid instruments. Eg: Currency, commodities, indices,
high liquid stocks, etc
 Above 2 points ( 1 & 2 in red) use them when u see a zig-zag wave
 Whenever u want to bottom fish at the end of wave 4. Use reverse divergence for
additional conviction
 Normal divergence: If we identify divergence between 3rd and 5th wave, those
divergence have a high probability of reversal or correction
 Wave 4 or Wave B, practice to be able to identify correction
Bullish Divergence

Bullish Divergence Bullish Reverse Divergence

Where do we check for it At the bottom of a downtrend (Low) At the bottom (low) of uptrend
Uptrend is most likely to
What does it indicate Price has most likely bottomed continue
What does price do Equal low or lower low Higher Low
What does indicator do Higher low Lower Low

Bearish Divergence

Bearish Divergence Bearish Reverse Divergence

Where do we check for it At the top (High) of a uptrend At the top (High) of a downtrend
Downtrend is most likely to
What does it indicate Price has most likely topped continue
What does price do Equal high or higher high Lower High
What does indicator do Lower High Higher High

Important Points
Reverse divergence is mostly found at the end of fourth wave. However, whenever we find
reverse divergence, it does not mean, its end of fourth wave
Cross check with MACD, to know if third wave has ended. After the 3rd wave, a reverse
divergence in most probability indicates its end of fourth wave