Elliott waves. The theory of difficult but effective market analysis

Ralph Nelson Elliott was the first to put forward a technique based on the wave movement of the market. This was back in the 30s of the last century. While studying market charts, he identified a pattern in the cyclical movement of prices; it is on this principle that Eliot's wave theory is based.

Working in this direction, Elliott published a book called “The Law of Waves” in 1938. In it, he outlined his theory in detail, which later became known as “Elliott’s theory.”

Looking at any chart, one can note a certain alternation of segments of price movement. They represent waves, namely the movement of the market from one turn to another and so on several times.

Elliott Wave Definition

A wave and a trend are similar in many ways. Thus, trends can be distinguished by scale, size, and they may include several smaller trends. Similarly, waves enter one another. This definition of a wave must be defined for yourself from the very beginning in order to avoid possible mistakes in the future.

For example, an uptrend is developing. It, in turn, consists of smaller trends (waves). Those waves that move in the direction of the general trend are called active, and those that move in the opposite direction are called counteracting.

It follows from this that the active Elliott waves move the market according to the general trend, while the opposing ones correct these movements.

Some waves are only capable of forming wave patterns of two types. The figure below shows this example with a general uptrend.

The first wave is a five-wave impulse structure. Its components are three acting waves and two counteracting ones. They are designated by numbers. Five-wave impulses are found only in active waves.

The second wave is a three-wave correctional structure. It consists of two active waves and one counteracting one. This type is designated by letters. The three-wave structure is found in opposing and acting waves.

There are many varieties of correctional wave patterns. We will look at them separately in subsequent topics.

Elliott wave fractality

As we have already said, Elliott waves can nest within one another. This state is called fractality. It implies that each wave is enclosed within a larger one, and also has several smaller waves inside. As an example, consider the EURUSD currency pair.

The 2nd figure shows the impulse in wave 1. It is identical to the impulse shown in Figure 1. On it, the markings of the main waves are indicated in green and lowercase Roman numerals.

Chart 3 shows that wave 1, shown on chart 1, is part of a larger wave structure: this is the first wave within the third.

If we move to a larger period, the momentum in the first wave will decrease as larger waves form there.

Let's look at the third Elliott wave (wave) in more detail from the second picture.

Thus, the wave structure includes five waves, as confirmation of impulsiveness. In addition, the chart also shows smaller waves, that is, compound Elliott waves (iii).

On chart 4, wave iii is shown in a white ellipse. On graph 5 you can examine its structure in more detail, and also determine whether it will be an impulse.

In the case where we received a marking in which the structure of wave iii does not belong to a five-wave structure, in all likelihood, an error was made.

Regarding wave iii, we can say that all the rules were followed here and as a result, an impulse wave structure was obtained, so the marking was correct. In these examples, it is worth noting that the largest are the third waves.

So, Elliott waves have an important rule: an impulse includes only five waves.

Speaking about the fractality of waves, we draw the following conclusions:

Any wave is part of a larger one and also consists of smaller ones.
One chart contains Elliott waves of various scales.

Levels and markup notation in Elliott theory

So, we found out that one chart can contain several waves of different scales. They are called wave levels and are based on the principle of fractality. The levels have their own name and markings, but the Elliott wave theory does not imply a specific connection between the time frame and the wave level.

Figure 6 shows the Wave Marking Notation.

On it you can see a list of the names of wave levels, decreasing from top to bottom, it is located in the left column. The following columns contain markings related to a specific level: the lower the Elliott wave level, the fewer symbols its name consists of. Above you can see that the waves are divided into triads: the upper ones are marked in a circle or square brackets, the level below is marked in parentheses or without them. The color and notation depicted are generally accepted.

Designations marked in circles can be placed in square brackets (for example, like this [i]).

When applying the marking for the first time, it can be difficult to determine from which wave level to start. In Figure 6, a note is highlighted where a specific wave level has its own time frame, which determines the time it will be on it. Based on this, you need to build your actions. For example, you need to mark the daily chart: a wave consisting of 100-200 bars will be marked as Small level - 1. You just need to take into account that the first wave must be on the chart.

Let's look at Elliott waves using wave marking notation on charts 7 and 8.

Chart 7 shows the daily chart of EURUSD. The third wave, 180 bars long, is indicated by a small level. Therefore, the waves inside it are marked as the minute level (lowercase Roman numerals, enclosed in a circle or square brackets). It will be followed by a smaller level, called small (with its help we mark the structure of the wave).

According to Chart 8, wave 3 is part of the average level, and the average level makes up the primary wave level (wave [A]).

The preposition of can be used to denote the embedding of a certain wave into another. Thus, seeing the record (i)of (Chart 7), we understand that wave (i) of a small level is a component of a minute-level wave. Similarly, we can designate a wave relatively older: (i) of 3 or of 3.

Glossary of terms used in Elliott theory

Having studied the Elliott wave theory in books, any beginner who finds himself among wave experts on any forum will encounter a lot of incomprehensible terms, since they are very often abbreviated or anglicisms are used. The most frequently used expressions among wave specialists are described below in detail.

EWA – wave analysis, very common (English: Elliott Wave Analysis).
EWP - Elliott Wave Principle, means the abbreviated name of the book by R. Prechter "Elliott Wave Principle Key to Market Behavior" (Russian: "Elliott Wave Principle - the key to understanding markets"). This abbreviation may imply wave theory as a whole.
EWI - Elliott Wave International. Refers to the Elliott Wave training and forecasting company founded by R. Prechter.
1-2 1-2 – on charts this is the sequence of the first and second Elliott waves.
DT – abbreviated as “diagonal triangle”. Used to indicate the starting or ending diagonal.
PDS – means the initial diagonal structure (wedge or initial diagonal triangle).
ZDS – means final diagonal structure (terminal diagonal triangle)
The entry wave is a five-wave, i.e. impulse formed against the current trend. It is often assumed to be the first wave of a new trend, but very often turns out to be a corrective wave A.
Irregular – means the general concept of corrections: in which wave B or X extends beyond the extremum of the previous wave. In particular, if wave B is greater than A, this plane is irregular.
Count – a chart with wave markings.
The signal line is based on the method of D. Stukalov. It involves constructing a line in the impulse at the zero point and the end of the second wave. According to theory, the impulse should not cross this line during further movement, but in fact, impulses quite often go beyond the boundaries of this structure.
Terminal (terminal impulse) is a concept that came from the works of G. Neely. Means diagonal triangle: ending or starting.

Criticism of Elliott waves

Very often on various market forums, the Elliott wave theory is criticized. We will devote this topic to a detailed study of the standard complaints expressed by forum participants, and as an example, we will take a recent statement by one of the participants of our site.

The main criticism of Elliott waves is that wave analysis is subject to multivariance. That is, markings can always be done in such a way that buy and sell transactions will look equally good. This is true. Wave analysis is a subjective concept, and the final marking directly depends on the beliefs of the trader himself. But this does not give a reason to write off Elliott waves for trading in the market.

So, for example, for marking the EuroDollar, you can, for example, highlight 3-5 expected options for price movement. And this is talking about the main scenarios, while there may be much more additional ones. The description of each of these counts is, by and large, meaningless, since it can only confuse readers. It can be said that identifying the most important options from a large amount of information is the main meaning of the work that Elliott wave theory implies, but such skills are developed only through experience.

For example, the marking is counter-trend, then in this case, with a sufficiently strong trend, the degree of its development will be lower than that of the trend option. This situation is quite difficult for beginners. Some traders, at the beginning of their activities, mistakenly try to look for “zero points” and reversals. Often this approach indicates an incorrect use of wave analysis.

More specifically, when using any market analyzer, it involves two methods: searching for reversals or trend continuation points. It is important to understand that trading on reversals is only possible for talented traders who have extensive experience in trading and, in addition, have an excellent market sense. Therefore, beginners should not look up to such professionals.

Methods for solving multivariance in Elliott waves

Let's look at several ways that help solve the problem of multivariance that Elliott waves have. Here are the main methods that are recommended to be used in such cases:

The marking should not be considered as a signal to open a transaction. To enter the market, you should find several options and correlate them with the current trend, in addition, consider its chances of development and reversal.
Don't move against the trend. When there is a confident upward price movement, selling in this case is not advisable. Even focusing on existing market reversals. Having many counter-trend markings, it is not necessary to play each of them.
Confirmatory and critical levels of markings should be defined. Without clearly understanding when it is necessary to switch from using one option to using another, it will be very difficult to trade.
In all kinds of incomprehensible situations, you need to stay outside the market. If Elliott waves develop into a very confusing structure, it is better to take a break from trading and wait for a more understandable marking.

We have listed the rules that are not something complicated and confusing. They are quite simple, but traders often do not follow them, succumbing to certain emotions when trading.

So, for example, if you open a trade without any solid justification, the market analysis method used will not bring results, in other words, it is not responsible for your rash actions. It is not correct to blame Elliott waves for failure on a dubious buy based on a diagonal triangle, or a counter-trend opening based on unreliable entry momentum. In these situations, the responsibility falls on the trader.

Therefore, seeing such reviews as, for example, “I sold, and then the stop was knocked out, half of the deposit was lost” or reviews in which they write that Elliott waves do not work at all, one becomes confident that such traders will always remain at a loss when using even other trading strategies.

Conclusion

Another difficulty that very often causes dissatisfaction among traders is that the Elliott wave theory is very complex. Undoubtedly, EWA is one of the most advanced trading theories. After all, it stipulates that it is necessary to evaluate the overall picture, covering monthly and current charts used by the trader. There is no indicator that does all this for you. Training is also a rather lengthy process, it can take up to a year. However, it is undoubtedly worth it.

In cases where trading on the stock exchange is a professional activity, then knowing and being able to use such a tool as Elliott waves is simply necessary. Such a system is the only one capable of analyzing market movements according to clear rules. In addition, it allows you to see the prospects for the development of a trend and the likelihood of it breaking. There are no analogues to this system.

When trading on the stock exchange is a secondary income or just a hobby, it may not be necessary to use the market analysis method we discussed. This takes a lot of time. In an amateur approach, it will be enough to use a technique such as, for example, pipsing on a demo account. But not in cases of a serious and systematic approach.

Based on the fact that trading is a purely individual process, any trader has the right to choose exactly those instruments that are most suitable for his character and mindset. Fortunately, there are a huge variety of techniques and approaches. But there are traders for whom Elliott waves paint the clearest picture of the market. So, for example, having some experience, you can no longer mark the chart, and on an empty chart you can perfectly cope with counting waves. In certain senses, markup is a hindrance in trading and for this you can use a separate profile in MetaTrader, which contains empty charts with moving averages.

Thus, any method of market analysis can be called untenable, including the theory implied by Elliott waves. Therefore, it is not the trading method that is important, but, above all, the ability to use it.

This was the first part on Elliott Theory. To be continued.

Today, when all the price formation is before our eyes and we are watching the market on the monitor screen, the fact that the market moves in certain waves has become simply undeniable.

Agree, there is no need to have any knowledge in the field in order to see that any major price movement is always accompanied by corrections, and the chart itself resembles a series of waves replacing each other?

However, if this fact is obvious now, then in an era when quotes were a simple tape with numbers, and the market for many seemed to be a kind of chaos, Ralph Elliott's thunderous assertion that the price moves according to a certain pattern, which he called Wave (Elliot Wave), was, to put it mildly, puzzling.

Huge a storm of criticism fell on the new Elliott wave theory from his contemporaries, but at the same time there were also followers who developed the concept and use this type of analysis to this day...

Elliott wave theory

Ralph Nelson Elliott, like many stock traders who have written their names in history, was initially far from trading on the stock exchange. Moreover, he was an ordinary official who embodied US policy in other countries.

For example, at one time he served as Minister of Finance in Nicaragua, which at that time was controlled by the United States. He was interested in business and economics, but not in the stock exchange. However, a coincidence of circumstances turned Elliott's life upside down in such a way that he had to get acquainted with the stock exchange.

>The fact is that before the advent of the wave theory, Ralph Nelson Elliott published two books. The first was a kind of ideal manual on how to organize a tea room and cafeteria, and the second touched on in-depth economic analysis and prospects for Latin America.

However, circumstances developed in such a way that due to illness he found himself virtually bedridden. Therefore, in order to somehow occupy his mind, he began to actively analyze the seventy-year history of key indices on various timeframes, where he actually found his five-wave pattern.

Building waves

The key pattern that Eliot discovered was a structure consisting of five main waves and three corrective waves.

At that time, this was a discovery, because based on his research, it turned out that the market is not just cyclical, but regular and constantly replacing each other.

So, for you to understand, the general appearance of a five-wave formation is as follows:

To determine the first point of construction, it is necessary to take as a basis the extremum, which became the starting point for the end of the previous trend;
The second point is the first end of the rollback from the new trend or, more simply, the correction of the first wave;
Point 3 or the third wave is a new extremum, which should rewrite the extremum at point 1, namely, be higher than the first wave. It is worth noting that the third wave is the longest wave;
The fourth wave (fourth point) appears due to the appearance of a correction from the third wave. It is important to keep in mind that the formed point 4 should not rewrite point 1, that is, the first wave;
The fifth Elliott wave appears due to the appearance of a new extremum, which should rewrite point 3 and consolidate behind it;
Waves A-B-C are a corrective price movement from the main five-wave formation, which can be taken as the main trend. It is worth noting that wave A should be approximately at the same level as point 4, while wave C overwrites it.

In order to simplify the process of marking wave theory as much as possible at the initial stage, many traders use a tool such as, which allows you to connect extreme points with each other.

However, if the theory seems simple in the pictures, then Elliott waves on a real chart have a less ideal character. Example:

Practice using Elliott waves

The overwhelming number of traders always wonder how to apply this figure in the Forex and binary options markets? Is it really necessary to wait for the construction of the whole picture and the whole puzzle?

In fact it is important to understand that the Elliott wave theory is a kind of worldview, since the figure itself is cyclical and appears constantly. In addition, almost every wave can be used by a trader, depending on the level of training and qualities.

But at the initial stage, it is worth entering the market only on the third or fifth waves, while corrective waves A-B-C are used as a kind of statement of the end of the current trend.

In order to make a profit, you need to wait for the formation of points 2 or 4 (the second or fourth corrective wave), and then open a trade in the direction of the trend and build the figure.

As a conservative option, a breakout of extrema is used, which are located at point 1 or 3. Example:

In a simple and accessible form, provide the basics of a basic course on wave analysis by Ralph Elliott- the most expensive of all kinds of “Forex training” courses and the most difficult of all sections of technical analysis of trading.

We have this material from the 11th grade of the School of Beginning Traders at the Academy Masterforex-V on a closed forum, where training begins from scratch - a basic school course, then Elliott wave analysis models and their interpretations of MF are used in the form of tips on a closed Academy forum.

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

Below are Elliott wave analysis models. It is unlikely that you will remember them the first or even the second time, but try to simply determine for yourself where:

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

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

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

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

Rice. 2. Drawing of an upward (bullish) trend

The meaning of Elliott waves for a Forex trader

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

Structure of sub-waves in a trend

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

Rice. 3. Wave structure of impulse and correction

Rice. 4. Sub-wave structure

Characteristics of each wave

Wave 2 = 0.382-0.618 of the length of the 1st wave.
3rd wave = 1.618-2.618 length of the 1st wave.
4th wave = 0.382-0.5 length of the 3rd wave.
Wave 5 = 0.382-0.618 of the length of the 3rd wave (wave 5 = 1.618x1 wave if it is extended).

Wave A = 1, 0.618-0.5 wavelength 5.
Wave B = 0.382-0.5 wave A length.
Wave C = 1.618 or 0.618-0.5 wavelength 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 = 0.236×A wave.

Waves and sloping trend channels

the top of the 1st and 3rd waves;

This will allow you to see

the top of the future 5th wave.

Drawing

then after the end of the 4th wave - the Final Channel.

Rice. 5. Temporary inclined channel

Rice. 6. Final inclined channel

Extended 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

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

Drawing

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

Rice. 7. Extended 3rd wave

Rice. 8. Types of extensions

Questions for the next level of training (Masterforex-V Academy)

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

Truncated waves

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

has a 5-wave structure;
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 number 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 one is approximately 0.618 to 1, and to the next lowest one is approximately 1.618 to 1.
The ratio between consecutive numbers 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 targets for the movement of impulse and retracement waves.

Impulse wave = Fibonacci extension levels (162-362% of the 1st wave).
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. Third wave of the correct length

The meaning for a trader of the axioms of wave analysis and force majeure that cancel momentum

If the impulse is canceled there is no continuation of the trend.
The currency will not stand still (if it cannot go up, then it will go down).
At the Masterforex-V Trading Academy, both options of the trading plan are given daily with clear criteria for transitioning from one option to the other.

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 impulse waves and 3 correction waves;
a complete cycle of 5 waves of impulse and the 3rd wave of correction is just one wave of a higher level;
this higher level wave is just a sub-wave of the next level.

Prechter gives 8 levels for wave numbering using the following "close to Elliott" symbols.

Table 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 - second wave of the main level;
1942-1966 - third wave of the main level;
1966-1974 - fourth wave of the main level;
1974-19?? - the fifth wave of the main level.

Rice. 21. Supercycle according to Prechter

An example of the designation of waves by classical wave operators and their interpretation

Rice. 22. Classic wave marking of market movement

Explanation of the picture:

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

Wave structure of several wave levels

Rice. 23. Wave level ratio

Diagonal triangles as special 1st and 5th waves of impulse

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

Signs of a trend reversal from the point of view of wave analysis

Finite diagonal triangle.
Extended 5th wave.
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

The movement on these waves takes the form of the following correction patterns:

Zigzags (5-3-5) (Zigzags), or simple (zigzag) correction.
Flats (3-3-5), or flat correction.
Triangles (3-3-3-3-3) (Triangles), or Triangular correction.
Double threes and triple threes (combined structures).
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 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 extensions.

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: convergent and divergent.

Convergent triangle

Rice. 36. Converging triangle

Rice. 37. Converging triangle

Rice. 38. Converging triangle in the fourth wave

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

The essence of the alternation is that if the 2nd wave is a sharp correction, then the 4th wave will be a sideways 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

This is a brief essence (basics) of Elliott wave analysis, set out in hundreds of pages of books by Prechter, Frost, Fischer, Vozny, Balan and other classical wave scientists.
This material in one form or another is given at expensive courses at Dealing Centers and brokerage companies as the highest stage of Forex technical analysis.
This material is presented in the Masterforex-V Academy as initial stage of Forex analysis and training (11th grade of the School for Beginning Traders at the Masterforex-V Academy).
At the closed forum of the Academy (the theory of the Masterforex-V trading system, other trading systems and DAILY practice in applying the theory to specific trades) - numerous examples of methodological and practical errors of classical wave analysis of trading, including examples of how masters of wave analysis in 6 working days They redo their previous wave analysis 5 (!) times. Thus, currency pairs absolutely do NOT go in the same way or where the “laws” of wave analysis as interpreted by a specific master (D. Vozny, etc.) prescribe for them.
In subsequent chapters of the book, we will try to come to the METHODOLOGICAL shortcomings of specific methods of Elliott wave analysis, solving specific UNSOLVED mysteries of classic Elliott wave analysis in the Masterforex-V trading system, which, I hope, will help traders in working on Forex.

We continue our series of articles on technical analysis and today we will talk about Elliott waves. This tool will help you better understand the nature of the market, since in fact it reflects the deep fundamental processes occurring in the market - fear of participants, greed, euphoria, etc. By understanding the behavior of the market, you will begin to understand what is currently happening with a particular security or the market as a whole and draw conclusions about future trends.

Elliott wave theory

In the thirties of the twentieth century, the American accountant Ralph Elliott discovered the principles of the movement of stock prices. He determined that the nature of price changes obeys certain rules. If you look at any graph, you can see the alternation of different segments of the completed movement in the form of a wave. The price moves to the top of the wave, then goes down, and so on continuously. The wave theory was known earlier, but it was based only on the behavior of market participants, and Elliott used historical data for 80 years.

By studying market charts, Elliot developed the wave theory, which is now known to everyone involved in investing and stock trading. This theory is applicable to any markets, since price movements are determined by people and society, subject to the laws of nature (psychology, sociology, physics, etc.). Market activity rolls in like sea waves, breaking up into smaller ones. Elliott 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 famous analyst Robert Prechter wrote a book about the use of wave theory for technical analysis of market prices.

Elliot based his theory on Fibonacci numbers. The Fibonacci numbers 3, 5 and 8 form a complete wave cycle. These are five waves of the growth cycle, a correctional cycle of three waves, and the full cycle is eight waves. There are three rising waves and two falling waves in a growth cycle. There are two downward waves and one upward wave in a correctional cycle.

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

The main difference between an impulse and a corrective movement is the internal structure of these movements. The term “impulse” itself was first used by Prechter. Elliott designated such a movement as “motive,” defining this stage of market behavior as the most important and significant. Each cycle of market movement is characterized by growth or decline. Elliott's merit is 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 it. There are three waves in a corrective movement. Here it’s the other way around - two are with the trend, and one is against it. To designate these models in the technical analysis system, 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 movements. In practice, cycles can take the form 9:7, 13:11 and the like.

To display different cycles, a digital designation is used for impulse waves, and a letter designation for correction waves. That is, the impulse is waves designated by numbers from one to five, and the correction is waves A-B-C. An important part of Elliott's theory are his axioms. These are provisions on maximum and minimum wavelengths and non-crossing of waves. The axioms are the basis for correctly recognizing the nature of the wave.

Elliot Wave Nesting Concept

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

There can be many such degrees of investment. Ralph Elliott distinguished nine levels in the trend development cycle. The "Great Supercycle" takes 200 years, and the shortest degree lasts only a few hours. The basic rule of wave theory is that no matter the degree of investment, the trend will always form in accordance with the basic eight-wave cycle.

Thus, a wave hierarchy is created, where each time frame has its own place. The basic formula of the cycle structure will be preserved at any scale of observation, right down 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 the tick.

Elliott theory does not contain the usual concepts of time frames. He introduced the concept of degrees, the main one of which is called Cycle. Above are the Supercycle and Grandsupercycle. Lower degrees have practical application. These are Primary, Medium and Minor. Even lower are Minute, Small and Ultra-small. To understand the description of cycles, special notations were introduced that are used by specialists in wave analysis. Numbers are used to indicate waves along the trend. Latin letters are used for correction waves. If nested waves are reflected on one chart, then larger waves are indicated in large letters and numbers or in capital letters, smaller waves are indicated in capital letters.

Basic price movement patterns

In developing the theory, Elliott did almost nothing to determine the individual signs of waves (the English term “wave personalities”). Robert Prechter developed this aspect of the theory in more detail. Elliott considered three impulse waves, while Prechter in his book changed the terminology and examined the individual characteristics of all waves. Knowing the signs of waves for technical analysis is useful, especially in cases where it is difficult to obtain a clear picture of the wave count.

Signs of waves will be unchanged at 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 shortest in length. In some cases, the first wave forms very quickly, especially if it originates at the very bottom of the market.

The distance covered 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 confidently be maintained much higher than the starting point of the first wave. Traditional graphic patterns are formed from such movements. This can be a “head and shoulders” (inverted) pattern, as well as a “double bottom” or “triple bottom” pattern.

The fastest growing and longest of all, usually the third wave. This rule is most accurately followed in the stock market. When the third wave crosses the highs of the first wave, then this is considered a classic breakout and a corresponding signal to open positions. All trend trading systems from this moment begin to operate in the hope of an increase. During the development of the third wave, the increase in trading volumes grows rapidly, and frequent breaks (gaps) are indicated on the charts. This wave has the highest probability of stretching.

The fourth, that is, the correctional wave, forms more complex structures. This manifests itself in the forms of consolidation, sideways, 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 extended. During 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 of a near market top. (see articles about or.

The first corrective wave, which is marked “A”, is quite difficult to correctly identify in time. Its emergence seems to be a slight retreat 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 lower-level waves. If by this time 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 an 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 exhibit serial divergences. Trading volumes during the growth of wave B are small, since most buyers leave the market.

Wave C fully confirms the end of the upward trend. 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 the uptrend, a “head and shoulders” figure may form. It often serves as a strong reversal signal.

All these are signs of impulse 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 contain five waves of a lower degree. In most cases there are three waves, but in triangles there can be more. There are four main models of corrective waves.

The simplest model is “zigzag”. This is a three-wave configuration directed against the trend. It forms five waves of the first phase and three in the rest. The second is a flat corrective wave with three waves in the first phase. This wave is also called consolidation, and it indicates the strength of the 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 minimum and maximum through which trend lines are drawn.

The last type of correction wave is relatively rare. These are double and triple wave triplets, that is, combinations of two or three a-b-c combinations. When combined, they produce seven or eleven waves. These complex patterns are very similar to a consolidation rectangle (aka trading range).

Wave theory signals

The fact that a trend movement consists of five waves is typical only for ideal market conditions. It often happens that some impulse wave stretches, taking on an elongated shape and forming 5 additional waves. First wave stretching occurs quite rarely. In equity markets, the third wave extension is most common.

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

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

Driving forces of wave formations

Elliott created his theory based on the analysis of stock market indices, more precisely, the Dow Jones index. He tried to find connections 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 the driving force behind market changes. The wave theory quite accurately reflects the processes occurring in the stock market.

The more confidently stock prices rise, the more buyers appear, and when prices fall, more and more people want to get rid of them. Since the movement is determined by the behavior of a large number of players, the joining 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 waves. This is clearly seen in the growth of the share price of the famous company Tesla Motors. Here the picture emerges from $17, the share price at the time of market entry. On the chart we see that five waves of growth have been formed, then three waves of correction and the beginning of a new rise:

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

Then a corrective second wave began, when shares were sold by investors who were unsure of a further rise. When it became clear that the company was developing steadily, the flow of buyers, including speculators, increased, creating the effect of increasing traffic intensity. In three years, Tesla Motors shares rose to $265. The third wave, exactly according to 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 to $180. By this time, the company had become widely known, and the stability of its work and prospects were not in doubt. Massive buying of shares began and the fifth wave grew to the level of $290.

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

Results and conclusions: pros and cons

At first glance, Elliott's theory may seem difficult to understand and study. Of course, there is no point in doing it for amateurs in the market. But for stock exchange professionals, knowledge and ability to use this tool is simply necessary. This is the only system that can analyze market movements in accordance with clear rules.

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

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Profitable investments for you!

I present the best forex books on Elliott waves, which you can download for free.

1 . The most popular wave analysis course

Wave analysis usually causes very great difficulties. A course that is very popular will help you quickly and clearly with numerous examples and lessons.

2. Ralph Elliott "The Law of Nature. The Secret of the Universe"

Here is a book by the father of Elliott wave theory, Ralph Elliott, written in 1946. This work brought together all of Elliott's previous works in a final monograph. Ralph calls the book “The Law of Nature”, through the prism of his discovery, found on stock price charts, he describes the real “Divine Law”, shows the principle by which human society develops, the ancient pyramids were built, and by what rules any processes that can be traced occur everywhere in nature.

3. A. Frost, R. Prechter “A Complete Course on the Elliott Wave Law”

Elliot waves are one of the most popular market forecasting methods. The authors of the work are not theorists: one of the creators of the book is the winner of the trading championship in 1984; accounts with real money were used in the work. The creators warn: you cannot master Elliott’s theory right away, especially from fragmentary articles on the Internet, you need to study this tutorial and apply a lot of effort and patience. The presented manual is suitable for serious and thoughtful work for people who truly want to comprehend the laws and secrets of waves.

4. J. Frost, R. Prechter “The Elliott Wave Principle. The Key to Market Behavior

The book presented is a true classic, a work of the 20th edition. Robert Prector and J. Frost are probably the most famous authors on the topic of Elliott waves, of course after the creator of the theory himself. It is with the help of the presented book that most people are familiar with the theory and can rightfully appreciate and apply it in their trading.
Back in the 30s, a method was born that changed people's worldview on the nature of stock prices. Regularities were found that do not become obsolete, the laws by which the exchange price moves were revealed.

5. Boriskin V. In "Harmonic wave analysis"

We can say this is a unique book about wave analysis. Practicing traders should read this book; Elliott's complex theory is significantly simplified and expanded. The work combines theory with practice. The visitor will be pleased with clear pictures in color and numerous explanations. This work is not a break from reality and not a theory far from “life”. The work was written by real traders, the authors understood how important clear formulations are and the ability to use the acquired knowledge immediately after reading. The book has become a real “Know-how” that combines two approaches at the same time: the one that most traders practice and the wave theory.

6. Bolton "Complete works on Elliott waves"

One of the earliest works on Elliott waves. The book was written long ago in the 60s of the 20th century. Author A.G. Bolton is a man who is impressed by the market predictions of this method. However, the author does not limit himself to a terse retelling; Bolton had his own critical thinking and opinion on the topic. Some points have been simplified, some have been added. The main idea of writing a textbook is to rid the theory of uncertainty, make the rules clearer and more accessible for practical use. The described theory was discovered by Elliott in the mid-30s.

7. G. Neely “Mastering Elliott Wave Analysis”

A book about the scientific approach of Elliott wave laws. The presented method is the first successful attempt to represent the theory with rigorous, consistent algorithms. All the nuances that make up the forecast method are carefully analyzed. There is nothing superfluous in the book, the work was created and perfected over 10 years - the authors claim that every sentence is important, you should not read the work between the lines. The subject is revealed in depth and detail; the reader will appreciate the accessibility of the language, simplicity of presentation and quality of teaching. The authors were able to significantly improve the teaching created almost 100 years ago, found new, previously unknown models, all this increased the significance and value of the method.

8. Dmitry Vozny "Elliott Code: wave analysis of the forex market"

A book by a Russian author about Elliott waves. The material is adapted for the Forex market; Vozny himself is a leading analyst of the Forex broker Alpari, a researcher and a talented writer. The author not only retells a theory that was once created, he is the creator of his own branch model with unique markup and numerous additions and clarifications. The work was approved by the wave guru - Prektor, the author of a famous manual on wave analysis, a recognized expert in this field, who was the guru of the decade in the 80s.

9. Vozny "A Short Course on the Elliott Wave Law"

You can call this brochure the second part of Vozny’s book “The Elliott Code”; unlike the first, this 84-page manual provides a summary of the theory as a whole, which will be useful to traders who practice this theory directly in trading. The purpose of the book was not to teach you Elliott waves, but only to reinforce, repeat and generalize the material. Of course, you should not start studying theory from this book. It is better to read it when you already have a grasp of the material, but feel that there are gaps left or just want to have a “cheat sheet” at hand. Having learned the theory, you may be able to make more far-sighted decisions on forecasting the price of the selected instrument; your vision will become broader and more global.

10. Balan "Elliott Wave Principle: Application to Forex Markets"

A book about wave theory, specially adapted for the Forex market. The volume of material is insignificant: 109 pages, however, this is rather a plus - it is always better to have a clear outline than a watery book. The forex market dates back to the 70s, after the rupture of the Bretton Woods agreement and the transition to free floating exchange rates. During this time, a lot has changed. The crash of 1987 showed that Forex is the most liquid and transparent market. The author, when creating the book, tried to make the product friendly and understandable for the reader. The tutorial consists of 8 parts: introduction to the theory, main concepts, waves with deviations from the norm, practical instructions, points of difficulty, trading plan, real examples for practical use, thoughts on the future of the theory.

11. Joseph "Simplified Elliott Wave Analysis"

The book is small - only 80 pages. The author about the book. The majority, about 90 percent of traders, refuse to use Elliott waves in trading, claiming that they do not work at all. At first I thought the same, but after applying simple approaches to the method and trading with them for seventeen years, I realized that speculators lose a lot by abandoning Elliott waves. This is the only method that determines the strength and timing of a trend. The main reason for abandoning the system is confusion, complex, ambiguous rules. After a lot of painstaking work, which took a lot of time, it was finally possible to create a simple theory in which only precise, consistent principles are applied

12. Safonov “Practical use of Elliott waves in trading: diagnostics, forecasting and decision making”

The tutorial consists of 3 parts. The first is the introductory part. He will talk about the essence of the theory and its place in the trading environment. The second part will outline the advantages and disadvantages of the theory, you will delve into the methodology and psychology of Elliott theory and gain your understanding. The disadvantages have their place in this part; they will be identified in this section. The material will push the reader to his own opinion about the theory. The final, 3rd part is intended for trading traders.

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