Disclaimer: The information's contained in this explanation is the result of my understanding of Elliott Wave Theory and may contain some errors. Search and confirm about it.
Table of contents
1. What is Elliott Wave?
2. Cycles and waves
3. The theory
4. Basic rules on impulse
5. How to trade?
What is Elliott Wave?
It was developed by Ralph Nelson Elliott to describe price movements in financial markets. Its principle is based on the idea that financial markets tend to follow specific patterns, whatever the time frame in which they observe and identify patterns of repeated fractal waves.
Elliott waves can be used to analyze financial market cycles and can be used in investor psychology, highs and lows in prices, and other collective factors.
Cycles and waves
The psychological behavior of trading is reflected in the form of waves rather than simple straight lines which is one of the biggest features of Elliott theory. It is a reflection of the Elliott studies of Charles Dow's work, in which the Dow theory states that stock prices usually move in waves.
It can be used as a tool for technical analysis and trying to determine market cycles and trends, but it is not a trading technique but rather a theory that may help in predicting market behavior.
Elliott saw that with each direction there are usually impulsive waves (five waves), followed by a corrective wave in the opposite direction (three waves).
This pattern repeats itself indefinitely on ever smaller scales, regardless of time scale.
The theory
Each impulsive movement will be followed by a corrective move. Where the first five waves can be represented by impulsive movements (called numbers 1-5) that move in the direction of the main trend. The next three waves provide corrective waves called A, B, and C.
Once the 5-3 move is complete, we have completed a single cycle.
The awesome oscillator can also be used to identify waves, as it compares the rate of change in prices. It can also be used to form the 5 wave using the 7-period moving average (DMA) and the 5-period shift to the right.
Basic rules on impulse
- Wave 2 never retraces more than 100% of wave 1;
- Wave 4 retraces more than 100% of wave 3;
- Wave 3 always goes beyond the end of wave 1;
- Wave 3 cannot be the shortest of the three impulse waves.
- Wave 4 is not in wave 1 area.
Elliott illustrated a series of categories for waves, which show when you will see the same patterns in both the long-term and short-term charts:
- Supercycle: (about 40 to 70 years)
- Cycle: one year to several years
- Intermediate:weeks to months
- Minor: weeks
- Minute: days
- Minuette: hours
- Sub-minuette: minutes
How to trade?
It can be used successfully if the following two conditions are met. It can also be used effectively with Fibonacci retracements.
- One-way pulse start and irregular correction.
- Impulse and correction as zigzag.
Look for the pulse as a quintuple movement in any direction, check if the end of the pulse is an additional three-wave structure (50%, 62% and 75%.)
Place your stop loss above the critical retracement level 75 and you can take profits by setting a third wave range based on the first wave.
Another scenario:
Look at rule three, and look for the fourth wave to be relatively shallow, with 23.6% -50% levels of particular interest. We can also look for the correct A, B, C move to be a 50% -61.8% retracement of the full impulse 1-5.
Very thankful: https://comparic.com/author/przemyslaw-jarzabek/
Source
Code:
https://www.ig.com/en/trading-strategies/elliott-wave-theory-explained-180830
https://comparic.com/elliott-wave-theory/
https://elliottwave-forecast.com/elliott-wave-theory/
https://www.investopedia.com/articles/technical/111401.asp
https://www.investopedia.com/terms/e/elliottwavetheory.asp#:~:text=Key%20Takeaways,that%20oppose%20the%20larger%20trend.
https://academy.binance.com/economics/an-introduction-to-the-elliott-wave-theory