FAQ | Downloads | Tips & Tricks
Trading the Elliott Wave
The Elliott Wave Principle provides you with the most objective
and disciplined method available for trading. Only a handful
of patterns exist, sometimes easy to recognize especially
in strong impulsive waves. The still validated patterns tell
you where the market is heading, in what way (or structure)
this will happen and under what circumstances the pattern
will produce a stronger probability. Also the pattern will
tell you when it is no longer valid due to the occurrence
of an intolerable price action. This makes it possible to
exactly determine your entry and exit points, which is an
outstanding characteristic of the Elliott Wave Principle.
The key to forecasting markets with ELWAVE lies in
determining the probabilities of alternative scenarios. If
you find several alternative counts pointing in the same direction,
you have found an excellent trading opportunity.
Some people, mainly those who can not successfully apply
the Elliott Wave Principle themselves, will tell you either
it is too complex and subjective or that the waves don?t exists
at all, suggesting the market follows a random pattern.
Obviously the Elliott Wave Principle can get very complex-
especially in corrective waves- since you will have to look
for patterns, which contain patterns, which contain patterns
etc. etc. But it will never lose its objectivity if you apply
the rules and guidelines. The only problem is that sometimes
it is not totally clear if the internal structure of a wave
is a 3 wave or a 5 wave. In that case you will have to determine
alternatives for both internal wave structures and look for
other confirmations, such as channels, indicators and Fibonacci
Below we mention the key steps for Elliott Wave analysis
and supply basic trading patterns to search for.
2. General directives for trading
Now you can use the Automatic Analysis, to trade profitably.
The more probable an outcome the better the opportunities.
The more the alternatives point in the same direction the
more certain that the market will move accordingly.
The Automatic analysis will generate an ever objective and
consistent wave count and will always present the most probable
outcome first, through applying objective rules and guidelines
and through implementing a true Elliott Wave model.
Those who really would like to learn the Elliott Wave
Principle must study the ins and outs. In the following,
we offer some directives. These directives come from our own
experience as well as from many publications on this subject.
Of course every trader or analyst should find his own path
Study the patterns mentioned under the section "Basic
- Know the rules and guidelines.
- Learn the internal structure of the patterns, which
will enable you to recognize a pattern within a pattern.
- Remember that only waves 1,3,5, A and C can be impulsive
- All other waves are corrective, against the trend, and
show overlap in their internal structure.
Design alternative scenarios by labeling a chart
- Start labeling a chart by taking into account the following
rules and guidelines:
- Separate impulses from corrections, an impulse normally
shows acceleration and no overlap, a correction
shows a sideways pattern.
- Waves of the same degree should have the same proportions,
which is especially important for waves 2 and 4. A
minuscule 4th wave cannot belong to a big wave 2 and
- Wave 2 can never retrace more than 100% nor
go beyond the origin of wave 1.
- Wave 3 normally is the longest wave
and shows the most powerful acceleration.
- In wave 3 there is never an overlap between wave
4 and 1, as occurs in fifth waves (and first or A
- Label the big picture, is it a three or a
- Label more in detail, by labeling the smaller
wave degrees initially, then go back to the large
wave degrees, changing your labels if necessary.
- Check if the required internal structure
of your waves, comply with the rules and guidelines.
For example a B wave never can consist of five waves
and so on.
- Check if the internal structure of the internal
structure is correct. For example an (expanded)
Flat consists of a 3 wave, again a 3 wave and a 5-wave
structure. If this is not true, change your labeling.
- Check your wave count for alternation, especially
with waves 2 and 4. If wave 2 showed a simple Zigzag,
wave 4 should show a complex pattern.
- A corrective pattern mostly minimally carries into
the territory of the 4th wave of the previous
- Within a 5-wave impulse, two waves will tend to
equality. If wave three is the longest, wave
5 will tend to equality with wave 1.
- Use momentum indicators and volume to support
your wave labeling. Wave 3 should have the highest
momentum and volume (if it is the longest wave).
- Calculate the Fibonacci relationships. If
your wave count reveals a lot of reasonable Fibonacci
ratios, you have found an interesting count.
- Draw channels and determine if your wave
count more or less fits these channels. The better
the fit, the better the count.
- Design as many scenarios as the Wave Principle allows,
with regard to the wave degree or time frame you are analysing.
- Do the same for shorter and longer time frames
(or lower and higher wave degrees) and try to narrow down
alternatives by fitting them to a multiple of wave degrees.
- Assess the probabilities of these scenarios
by studying their compliance with the permitted internal
wave structure, the outcome of the Fibonacci ratios and
the fit of the channels.
- Draw the expected price action and pattern of
each scenario you have designed, mark price levels where
you get signals to enter or exit the market.
Design a trading system
- Determine what time frame (or wave degree) you would
like to trade.
- Determine which patterns and alternative wave counts
give the best trading opportunities, such as when several
alternatives all produce a price movement in the same
- Determine objective entry points based on patterns.
- Determine objective exit points, also based on patterns.
You should for example exit a trade when a price movement
makes your preferred wave count invalid.
Control your emotions
- Don?t be afraid to take a loss if your stop gets hit.
This means you will have to admit you were wrong on this
trade. Don?t be afraid of loosing the (little) profit
you have made and only exit if your system or wave analysis
tells you to.
- Follow the rules of the Elliott Wave Principle and don?t
second-guess the market. Believe what ELWAVE tells
you, your stop will protect you.
- Of course there will be loosing trades, a 100% score
is impossible. But if you limit your losses (by executing
your stop) and let your profits run, you should be very
successful. So maintain your discipline and learn from
3. Trading example ::
In this section you will be shown how to recognize an impulsive
wave from a corrective wave. In the same way as these basic
patterns are compared and analysed here, you can do it yourself
with all other patterns.
Suppose the market has experienced a big sell off. From the
low it starts to rise. Wave 1 (or A) and wave 2 (or B) have
been completed and the market starts to rise again. The first
picture shows two scenarios possible, either an impulse (1,2,3)
or an A,B,C correction. The pictures thereunder demonstrate
which price action to expect in an impulse or in a correction:
The pattern can be an impulse only if the 4th wave does not
overlap the first, a level indicated by the horizontal "stop"
line. As soon as the price drops under this line- before
wave 5 has been completed- you have your first signal
of a pending correction (picture above at the right). This
correction will be confirmed when the price drops under the
origin of wave C, which is the end of wave B. Provided it
doesn?t drop under the "confirmation" line, it could
still be an extended 3rd wave that subdivides. In that case
the C or 3 wave is only wave 1 of the third wave! You will
find the pattern called extension under the chapter "Patterns".
Now we will try to apply the theory above in practice, step
In the previous graph you have already recognized a structure
consisting of three waves. Because there are three waves,
we are dealing with a correction, which is a movement against
the trend. Therefore the long-term trend is up and a new high
will be reached.
Underneath will be shown what happened next. Basically there
are two scenarios which could develop. Firstly the correction
could be terminated at point C and (2), finishing a Single
Zigzag. Secondly a Flat or Expanded Flat could
be developing. Then this market at the minimum will reach
its high in a 3-wave structure, decline again to approximately
point C and (2). Thereafter the larger uptrend will resume
and the market will reach uncharted territory.
With the above in mind it is crucial to determine if the
rise will have the form of a 3 wave or a 5 wave. Let?s take
a look at the picture:
To conclude, let?s take a look at the following price action:
By just looking at its form- the pattern has no overlap,
you can tell this definitely is a 5 wave, not a 3 wave and
indeed it reached the old high at 3000.
This 5- wave is the first wave of a larger wave degree, also
composed of five waves. Therefore a minimal price increase
of 25% (the same as wave 1) for the larger wave 3 can be calculated,
which projects a target of approximately 4000.
Since the above chart displays the price action of the Dow
Jones, we all know what happened. The market corrected a bit,
accelerated again and met a major resistance at 4000 as the
following picture demonstrates. Around 4000 again a correction
developed, indicating that the main trend was still up and
projecting even higher targets.
The same patterns evolve over and over again, enabling you
to forecast the markets and explain what happened afterwards.
4. Simple, but effective trading
| Since all patterns or their sub patterns are
either 3 wave or 5 wave structures, it follows that at the minimum
always three waves will occur, no matter what
Therefore if you concentrate on the 3rd wave, which will
be a wave 3 in an impulse or wave C in a correction, you have
a strong probability of making a profit.
The charts in the following pictures give an example of this
strategy in a rising, as well as a declining market.