This page will contain guides, how-to's, links to material, recommendations, etc.
Links:
First, and perhaps most importantly.
The "Bible" of Elliott Wave Theory is the 1978 book by Frost and Prechter (re-released in 2005), appropriately titled Elliott Wave Principle. If the link does not work, just search for it on Amazon or your favorite book seller.
A Brief Introduction
Elliott Wave Theory is basically the theory that movements in market are patterned. It was initially discovered by Ralph Nelson Elliott back in the early 1930's.
Closely tied with EWT, is the field of socionomics. R.N. Elliott discovered what the markets were doing, but not really why. Socionomic theory basically contends that human beings have a tendency to herd. The stock market, which is essentially the best recorded measure of human progress going back hundreds of years, provides the best means of viewing the aggregate behavior over time.
Elliott Wave Theory is in direct contradiction to other market theories, such as the random walk theory, or the efficient market hypothesis.
The essence of the wave principle
Important terms
Rules to remember
** It is possible in a diagonal triangle, but rare even then.
*** In diagonal triangles, wave 4 will often overlap wave 1
Remember that the rules are so-called, because they encompass all market patterns. Try not to break them. It is better to remain unsure of the pattern in play than to put the wrong labels on the chart knowingly. Not only will doing so likely lead you in entirely the wrong direction, but it will re-enforce the wrong behaviors. Your labels may not be correct even if you follow all the rules, but remember that this is a game of playing the odds. Try and see all the possibilities when considering the wave counts.
Let's look at the 5 wave pattern.
Above shows 5 waves, with the 3rd wave as the longest, which is very typical. Wave 4 does not overlap wave 1, and wave 2 does not make a new low. The rules are satisfied. Also shown are typical Fibonacci retracements for waves 2 and 4. Looking at the above picture, consider two things that I mentioned earlier. First, that the market is a fractal. That means the above picture could be describing years, or minutes. Second, that the market moves in 5 waves when going with the trend, but in 3 waves when going against the trend. So where are the 3 waves? In the above picture, waves 2 and 4 are going against the trend, so if you were able to zoom in, they would subdivide into 3 waves or a combination of 3 wave structures. Conversely, you would find that waves 1, 3, and 5 subdivide into 5 waves.
Now look at the picture below. Now it's starting to look a lot more like the stock market. If you look close, you'll see the pattern in the previous picture repeated over and over (3 times), separated by 3 wave retracements. In the next picture I've labeled them. If you can see the 5-wave structures without the labels, congratulations, you are more than halfway to being able to count Elliott waves. I need to cover a couple more topics, then we can attack a real chart.
As you look at the labeled chart, notice that the whole upward sequence is labeled ((1)), and the following 3-wave correction is ((2)). This again speaks to the fractal nature of the market. If you were to continue this pattern forward in time, you would see whole thing repeat for ((3)). The same is true going to a smaller time frame. Just as wave (1) subdivides into 5 waves, 1, 2, 3, 4, and 5, wave 1 of 5 would subdivide into 5 waves if you were to go to a smaller time frame.
As I explain the next few topics, you will see why things are not always as clear.
The market is not always in an uptrend.
Ok that might seem obvious, but remember the essence of the wave principle. The market moves in five waves when traveling in the direction of the one larger degree trend. That means if the larger trend is down, the waves traveling in that direction will be five waves. To illustrate that point, look at the chart above again. You will see that ((2)) is traveling against the larger trend, which is up. Therefore, ((2)) subdivides into three waves labeled (A)-(B)-(C).
Now look at the chart below.
We established that ((2)) is moving against the larger trend, so it's 3 waves, but in the context of ((2)), (A) and (C) are moving in the direction of the one larger degree trend, which is now down. Therefore, (A) and (C) are now five waves. Conversely, (B) is moving against the larger trend ((2)), so (B) is three waves, even though it is going in the same direction as ((1)) which is now two degrees higher.
Regarding corrective patterns, there is an exception for the sideways patterns that I will discuss below in the topic of alternation. In the sideways corrective patterns, the A wave subdivides into three waves, instead of five.
History doesn't repeat itself, but it does rhyme.
Apart from being a famous quote from Mark Twain, it is also an old market adage. As with many of these old adages, there is some truth in there. Human psychology ensures that these patterns will repeat over and over and over again, but they never happen in exactly the same way.
Alternation
Rather than being a rule (that which governs all waves), alternation is a guideline. But like extended third waves, it's something that occurs most of the time, so you should look for it, rather than the contrary.
Alternation manifests itself in a variety of ways.
First, alternation occurs in the corrective waves of an impulse wave. While corrective waves can be quite complex and hard to identify and label, there are really only two categories; sideways and sharp.
In a five wave pattern, if wave 2 is a sharp correction, expect wave 4 to be sideways, and the opposite is also true.
The other way the market achieves variety in corrections is by making combinations.
Below is a partial list of possible corrective waves you can encounter.
The first pattern you see in the chart above is the pattern that has been depicted in most of the above examples so far.
Sharp corrections are just about always zigzags or combinations composed of zigzags (sometimes called double or triple zigzags).
Sideways corrections on the other hand can be one or any combination of the above patterns. You can find additional patterns, including additional varieties of triangles in Frost and Prechter's book. As you may be able to imagine, things can get a little muddy when you string several of these patterns together.
In the chart below you see a five wave impulse, with wave 2 as a sharp correction, and wave 4 sideways. I don't want to go too far off track but I wanted to point out something about the wave 4 correction. Notice how there is a wave after the one labeled 3 that makes a new high, and then turns back down and makes a new low. This is a classic pattern shown in that chart above called an expanded flat. You could have easily put the 5 there, and been surprised when it turned back down, then made a new high.
The way to recognize a sideways correction is in the making is if the A wave subdivides into 3 waves instead of 5. If you think about the spirit of alternation, the difference with the A wave subdivisions is yet another expression of it.
Alternation can also occur in impulse waves. The way alternation happens in impulse waves are by wave extensions.
I've mentioned extensions a few times, so it's time to illustrate what they are. See the below chart.
The best way I can think of to describe an extension is that it is often longer than the other impulse waves, and you can see the subdivisions, which are of a lower degree.
In a five wave pattern, usually only one wave will extend. Typically, the wave that extends is the 3rd wave, as shown above, although it can happen in any of the impulse waves, 1, 3 or 5, or in both waves 3 and 5. Never will all 3 impulse waves extend, however.
The diagonal
I've mentioned this pattern a couple times, but I've saved it for last. Diagonals are what happens when a triangle and an impulse wave procreate.
Wow, that was a pretty terrible joke.
Take a look at the picture below, and you'll see what I mean though.
One thing you can say from this pattern right off the bat is that in no way can it be described as sideways. Assuming the direction of the larger degree trend is up, the above pattern is advancing the trend in that direction. That is a property of impulse waves. On the other hand, each wave subdivides into three waves, a-b-c, and that is supposed to be corrective. Additionally, wave (4) overlaps wave (1). What gives?
The "why" is a philosophical discussion for another day (and for smarter minds than mine), but here are the things to look for.
Ok, it's time for a little intellectual quiz.
Is the pattern in the chart below valid?
Ok, let's look at some real charts.
Before we start slapping labels on, there are some things you need to keep in mind.
There are ways to make your own analysis easier or harder.
Consider your scale/window orientation.
Below are two charts of the exact same symbol, on the exact same time frame. Silver ETF, SLV, on a monthly time frame.
The only difference between them is the orientation of the window.
Would you really want to try and count waves on the below window?
This is a rather extreme example, but it shows how you can make your own life difficult. I happen to have a nice large 30" monitor (2 of them actually), but expanding a single chart over the whole window might actually obscure the count by stretching out the chart. Just bear that in mind.
Also, for things like silver that go "vertical", try looking at a log scale, if your charting software offers that function. It might make the chart easier to interpret.
Choose the best possible time frame
You will do yourself a real disservice if you marry yourself to a particular time frame. The "right" time frame is the one where the waves come into focus for you. If you have ever looked at something through a pair of binoculars, you focus the lens and the object you are looking at, once blurry, becomes clear.
If the chart looks too "busy" consider a higher time frame. Conversely, if things are too flat, or you aren't seeing enough detail, consider a lower time frame. In general, you always want to at least glance at a time frame or two higher than the one you are interested in, just to orient yourself.
In the chart below we have 3 years Daily, Weekly, and Monthly.
Imagine if instead of looking at a person or an object, you could actually see the billions of cells composing that object or person. That would be information overload. That's precisely what happens when you try to count Elliott Waves on too small of a time frame for the period you are observing. It's like trying to count grains of sand at the beach. Plus, when you consider the possibility of extensions, corrections that make new price extremes, etc, your probability for human error in counting them accurately compounds exponentially.
Links:
First, and perhaps most importantly.
The "Bible" of Elliott Wave Theory is the 1978 book by Frost and Prechter (re-released in 2005), appropriately titled Elliott Wave Principle. If the link does not work, just search for it on Amazon or your favorite book seller.
A Brief Introduction
Elliott Wave Theory is basically the theory that movements in market are patterned. It was initially discovered by Ralph Nelson Elliott back in the early 1930's.
Closely tied with EWT, is the field of socionomics. R.N. Elliott discovered what the markets were doing, but not really why. Socionomic theory basically contends that human beings have a tendency to herd. The stock market, which is essentially the best recorded measure of human progress going back hundreds of years, provides the best means of viewing the aggregate behavior over time.
Elliott Wave Theory is in direct contradiction to other market theories, such as the random walk theory, or the efficient market hypothesis.
The essence of the wave principle
- The market moves in 5 waves, when traveling in the direction of the one larger degree trend.
- The market moves in 3 waves, when traveling against the direction of the one larger degree trend.
Important terms
- Degree - Elliott Wave Theory contends that market activity is a fractal, much like the sea shore. Whether you are looking at the shore from a standing position, from the top of a hill, from the top of a building, or from an airplane, it essentially looks very similar. You are just seeing a bigger or smaller piece of it, but it has roughly the same shape. The same is true of the market. You can be looking at a 10 year chart, or a 10 minute chart, and those periods with similar wave structures will look almost identical.
- Impulse waves - Waves that impel the market forward. This is when the market is trending. They always subdivide into 5 waves.
- Corrective waves - Waves that go against the trend. They subdivide into 3 waves, or a combination of 3-wave patterns, but never 5. In general, lots of overlap, and choppy sideways market action is corrective.
Rules to remember
- Wave 2 never retraces more than 100% of wave 1.
- Wave 3 is never the shortest wave**
- Wave 4 never retraces more than 100% of wave 3, and never ends in wave 1's territory***
- Waves 1, 3, and 5 will never all extend
- Diagonal triangles can only occur in wave 1 and 5 in an impulse, and waves A and C in a correction
** It is possible in a diagonal triangle, but rare even then.
*** In diagonal triangles, wave 4 will often overlap wave 1
Remember that the rules are so-called, because they encompass all market patterns. Try not to break them. It is better to remain unsure of the pattern in play than to put the wrong labels on the chart knowingly. Not only will doing so likely lead you in entirely the wrong direction, but it will re-enforce the wrong behaviors. Your labels may not be correct even if you follow all the rules, but remember that this is a game of playing the odds. Try and see all the possibilities when considering the wave counts.
Let's look at the 5 wave pattern.
Above shows 5 waves, with the 3rd wave as the longest, which is very typical. Wave 4 does not overlap wave 1, and wave 2 does not make a new low. The rules are satisfied. Also shown are typical Fibonacci retracements for waves 2 and 4. Looking at the above picture, consider two things that I mentioned earlier. First, that the market is a fractal. That means the above picture could be describing years, or minutes. Second, that the market moves in 5 waves when going with the trend, but in 3 waves when going against the trend. So where are the 3 waves? In the above picture, waves 2 and 4 are going against the trend, so if you were able to zoom in, they would subdivide into 3 waves or a combination of 3 wave structures. Conversely, you would find that waves 1, 3, and 5 subdivide into 5 waves.
Now look at the picture below. Now it's starting to look a lot more like the stock market. If you look close, you'll see the pattern in the previous picture repeated over and over (3 times), separated by 3 wave retracements. In the next picture I've labeled them. If you can see the 5-wave structures without the labels, congratulations, you are more than halfway to being able to count Elliott waves. I need to cover a couple more topics, then we can attack a real chart.
As you look at the labeled chart, notice that the whole upward sequence is labeled ((1)), and the following 3-wave correction is ((2)). This again speaks to the fractal nature of the market. If you were to continue this pattern forward in time, you would see whole thing repeat for ((3)). The same is true going to a smaller time frame. Just as wave (1) subdivides into 5 waves, 1, 2, 3, 4, and 5, wave 1 of 5 would subdivide into 5 waves if you were to go to a smaller time frame.
As I explain the next few topics, you will see why things are not always as clear.
The market is not always in an uptrend.
Ok that might seem obvious, but remember the essence of the wave principle. The market moves in five waves when traveling in the direction of the one larger degree trend. That means if the larger trend is down, the waves traveling in that direction will be five waves. To illustrate that point, look at the chart above again. You will see that ((2)) is traveling against the larger trend, which is up. Therefore, ((2)) subdivides into three waves labeled (A)-(B)-(C).
Now look at the chart below.
We established that ((2)) is moving against the larger trend, so it's 3 waves, but in the context of ((2)), (A) and (C) are moving in the direction of the one larger degree trend, which is now down. Therefore, (A) and (C) are now five waves. Conversely, (B) is moving against the larger trend ((2)), so (B) is three waves, even though it is going in the same direction as ((1)) which is now two degrees higher.
Regarding corrective patterns, there is an exception for the sideways patterns that I will discuss below in the topic of alternation. In the sideways corrective patterns, the A wave subdivides into three waves, instead of five.
History doesn't repeat itself, but it does rhyme.
Apart from being a famous quote from Mark Twain, it is also an old market adage. As with many of these old adages, there is some truth in there. Human psychology ensures that these patterns will repeat over and over and over again, but they never happen in exactly the same way.
Alternation
Rather than being a rule (that which governs all waves), alternation is a guideline. But like extended third waves, it's something that occurs most of the time, so you should look for it, rather than the contrary.
Alternation manifests itself in a variety of ways.
First, alternation occurs in the corrective waves of an impulse wave. While corrective waves can be quite complex and hard to identify and label, there are really only two categories; sideways and sharp.
In a five wave pattern, if wave 2 is a sharp correction, expect wave 4 to be sideways, and the opposite is also true.
The other way the market achieves variety in corrections is by making combinations.
Below is a partial list of possible corrective waves you can encounter.
The first pattern you see in the chart above is the pattern that has been depicted in most of the above examples so far.
Sharp corrections are just about always zigzags or combinations composed of zigzags (sometimes called double or triple zigzags).
Sideways corrections on the other hand can be one or any combination of the above patterns. You can find additional patterns, including additional varieties of triangles in Frost and Prechter's book. As you may be able to imagine, things can get a little muddy when you string several of these patterns together.
In the chart below you see a five wave impulse, with wave 2 as a sharp correction, and wave 4 sideways. I don't want to go too far off track but I wanted to point out something about the wave 4 correction. Notice how there is a wave after the one labeled 3 that makes a new high, and then turns back down and makes a new low. This is a classic pattern shown in that chart above called an expanded flat. You could have easily put the 5 there, and been surprised when it turned back down, then made a new high.
The way to recognize a sideways correction is in the making is if the A wave subdivides into 3 waves instead of 5. If you think about the spirit of alternation, the difference with the A wave subdivisions is yet another expression of it.
Alternation can also occur in impulse waves. The way alternation happens in impulse waves are by wave extensions.
I've mentioned extensions a few times, so it's time to illustrate what they are. See the below chart.
The best way I can think of to describe an extension is that it is often longer than the other impulse waves, and you can see the subdivisions, which are of a lower degree.
In a five wave pattern, usually only one wave will extend. Typically, the wave that extends is the 3rd wave, as shown above, although it can happen in any of the impulse waves, 1, 3 or 5, or in both waves 3 and 5. Never will all 3 impulse waves extend, however.
The diagonal
I've mentioned this pattern a couple times, but I've saved it for last. Diagonals are what happens when a triangle and an impulse wave procreate.
Wow, that was a pretty terrible joke.
Take a look at the picture below, and you'll see what I mean though.
One thing you can say from this pattern right off the bat is that in no way can it be described as sideways. Assuming the direction of the larger degree trend is up, the above pattern is advancing the trend in that direction. That is a property of impulse waves. On the other hand, each wave subdivides into three waves, a-b-c, and that is supposed to be corrective. Additionally, wave (4) overlaps wave (1). What gives?
The "why" is a philosophical discussion for another day (and for smarter minds than mine), but here are the things to look for.
- Diagonals only occur in waves 1,5,A, and C.
- In the leading waves, ie. 1 in an impulse, or wave A in an A-B-C correction, they are referred to as leading diagonals.
- In the ending waves, ie. 5 in an impulse or wave C in an A-B-C correction, they are referred to ending diagonals.
- Ending diagonals are always terminal, ie. the one higher degree formation is ending.
- They always subdivide into five waves, but extensions still apply.
- They normally take the shape of a wedge.
- Many of the rules for impulse waves still apply. Wave 2 does not retrace more than 100% of wave 1. Wave 4 does not retrace more than 100% of wave 3. Wave 4 will often overlap wave 1, however.
Ok, it's time for a little intellectual quiz.
Is the pattern in the chart below valid?
Ok, let's look at some real charts.
Before we start slapping labels on, there are some things you need to keep in mind.
There are ways to make your own analysis easier or harder.
Consider your scale/window orientation.
Below are two charts of the exact same symbol, on the exact same time frame. Silver ETF, SLV, on a monthly time frame.
The only difference between them is the orientation of the window.
Would you really want to try and count waves on the below window?
This is a rather extreme example, but it shows how you can make your own life difficult. I happen to have a nice large 30" monitor (2 of them actually), but expanding a single chart over the whole window might actually obscure the count by stretching out the chart. Just bear that in mind.
Also, for things like silver that go "vertical", try looking at a log scale, if your charting software offers that function. It might make the chart easier to interpret.
Choose the best possible time frame
You will do yourself a real disservice if you marry yourself to a particular time frame. The "right" time frame is the one where the waves come into focus for you. If you have ever looked at something through a pair of binoculars, you focus the lens and the object you are looking at, once blurry, becomes clear.
If the chart looks too "busy" consider a higher time frame. Conversely, if things are too flat, or you aren't seeing enough detail, consider a lower time frame. In general, you always want to at least glance at a time frame or two higher than the one you are interested in, just to orient yourself.
In the chart below we have 3 years Daily, Weekly, and Monthly.
Imagine if instead of looking at a person or an object, you could actually see the billions of cells composing that object or person. That would be information overload. That's precisely what happens when you try to count Elliott Waves on too small of a time frame for the period you are observing. It's like trying to count grains of sand at the beach. Plus, when you consider the possibility of extensions, corrections that make new price extremes, etc, your probability for human error in counting them accurately compounds exponentially.
It's not
always black and white however. Sometimes you can get 80 or 90% of the
way there on one timeframe, but encounter a wave that isn't well
defined, or makes no sense in the context of the rest of the chart. In
those cases you may need a higher or lower timeframe just for that wave.
Now let's look at a real chart of Silver.
Below is a monthly chart of the silver futures, symbol /SI, going back as far as my broker had data for,which is 1991.
The first thing you'll notice is that all the price action on the left looks scrunched, and on the right is going straight up.
Now look at the same chart on a log scale.
That's much better. Now we have more clearly defined waves.
Whenever you look at any chart, you have to start with what you don't know. In our case, since we don't have the price of silver in its entire price history, we can't be entirely clear about the larger degree wave counts. That may or may not matter, in the context of a trade or investment. In this case, we have over 20 years of price history. We can see that in this 20 year period, the lowest point occurred in 1993. There are other websites that provide more price history, but for the purpose of this exercise we will pretend we have no access to any other data.
It always makes sense to start from price extremes when you are counting waves.
Even with log scale, there is a definite difference in wave structure from the left side of the chart prior to 2002, and the post 2002 period. Price really started to shoot higher starting in 2002. Let's zoom in on the pre-2002 period first.
If you remember the first picture of the five wave structure at the top of this page, that's basically what we are looking for. In the entire rectangular region above, I can only really see one area where an identifiable five wave move stands out, starting in mid 97. Still, this is not occurring at a price extreme, but buried in a bunch of chop. That makes it likely a C-wave. This entire section of the chart is likely part of a larger degree corrective structure. The corrective structure is very sideways in nature, so odds are it's part of a fourth wave, or a B-wave. Also, bear in mind that this section of chart alone is ten years of price data, so we're talking about a higher degree wave of likely cycle degree or larger.
Now that we have established that the left side of the chart is likely part of a larger degree corrective wave, we can move to the price action on the right side of the chart starting in late 2001.
Again we start with price extremes, and work from there. A low was made in late 2001 and prices moved up into mid-2002 before pulling back significantly. You can see I have a fibonacci retracement shown for this initial rise, which showed the correction was precisely 78.6% of the prior move higher. Retracements of 50% or higher that do not make new price extremes are typical for second waves. The only problem with the first wave is that the fourth wave overlaps the first wave. The whole five wave structure, however, lies within converging boundary lines when you connect the end points, so this could be a leading diagonal first wave or A-wave. The three wave a-b-c correction ends in late 2002. I have the first wave marked with a pink line.
Now let's look at a real chart of Silver.
Below is a monthly chart of the silver futures, symbol /SI, going back as far as my broker had data for,which is 1991.
The first thing you'll notice is that all the price action on the left looks scrunched, and on the right is going straight up.
That's much better. Now we have more clearly defined waves.
Whenever you look at any chart, you have to start with what you don't know. In our case, since we don't have the price of silver in its entire price history, we can't be entirely clear about the larger degree wave counts. That may or may not matter, in the context of a trade or investment. In this case, we have over 20 years of price history. We can see that in this 20 year period, the lowest point occurred in 1993. There are other websites that provide more price history, but for the purpose of this exercise we will pretend we have no access to any other data.
It always makes sense to start from price extremes when you are counting waves.
Even with log scale, there is a definite difference in wave structure from the left side of the chart prior to 2002, and the post 2002 period. Price really started to shoot higher starting in 2002. Let's zoom in on the pre-2002 period first.
If you remember the first picture of the five wave structure at the top of this page, that's basically what we are looking for. In the entire rectangular region above, I can only really see one area where an identifiable five wave move stands out, starting in mid 97. Still, this is not occurring at a price extreme, but buried in a bunch of chop. That makes it likely a C-wave. This entire section of the chart is likely part of a larger degree corrective structure. The corrective structure is very sideways in nature, so odds are it's part of a fourth wave, or a B-wave. Also, bear in mind that this section of chart alone is ten years of price data, so we're talking about a higher degree wave of likely cycle degree or larger.
Now that we have established that the left side of the chart is likely part of a larger degree corrective wave, we can move to the price action on the right side of the chart starting in late 2001.
Next is a wave up that again is mostly retraced. This wave does not exceed the prior highs, so we now have two possibilities. Either the correction in late 2002 is not over, or we are in a third wave or C-Wave that is extending ,ie 1 of (3) or (C). If we were watching this live rather than looking at historical data, we literally would not know which was the case until we waited for more market price action. We are looking at historical data however, and we know the market rips higher from here, so I'm now inclined to say this is another first wave as part of an extension. I've marked this with a dark purple line. Remember this chart from above on extensions? I encourage you to take a quick look at it again and observe the (1)-(2)-1-2.
The next thing we see is what we have been waiting for. Finally, we have an identifiable five wave move. Starting in early 2003 and carrying into early 2004 is five waves up. In this case, the longest wave was the fifth wave, but note that the third wave was not the shortest. I've marked this whole five wave move with a dark purple line. Note that we had to count 1-2 three times in a row before we could advance to 3. The reasons for that are the rules. Any other count would have violated one of the rules.
More coming soon...
More coming soon...
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