1.) WAVE 3 IS NEVER THE SHORTEST (RULE).
This means that Wave 3 is always longer than at least one of
the other two waves (Waves 1 or 2). Usually, Wave 3 is
longer than both these waves.
Wave 3
You should never look for Wave 3 to be shorter than both
Is Never The
the other two waves. At times, Wave 3 may end up to be
Shortest Wave
equal in length, but never the shortest. There is no exception
to this rule.
2.) WAVE 4 SHOULD NOT OVERLAP WAVE 1 (RULE/GUIDELINE).
This means the end of Wave 4 should not trade below the peak of Wave 1. This rule cannot be violated in Cash Markets. In the Futures Markets, a 10% to 15% overlap can be allowed.
However, use an overlap count as a last resort.
5
5
3
3
1
1
4
NO OVERLAP
OVERLAP
4
2
2
INCORRECT
CORRECT
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Applying Technical Analysis
Elliott Wave Corrections
Corrections are very hard to master. Most Elliott Traders make money during an impulse pattern and then loose it back during the corrective phase.
An impulse pattern consists of five waves. The corrective pattern consists of 3 waves, with the exception of a triangle. An Impulse pattern is always followed by a Corrective pattern. Corrective patterns can be grouped into two different categories:
1) simple correction
2) complex correction.
Simple Corrections
There is only one pattern in a simple correction. This pattern is called a
Zig-Zag correction. A Zig-Zag correction is a three wave pattern where the 5
B
Wave B does not retrace more than 75% of wave A. Wave C will make
3
new lows below the end of Wave A. The Wave A of a Zig-Zag correc-
A
tion always has a five wave pattern. In the other two types of correc-
4
tions (Flat and Irregular), the Wave A has a three wave pattern.
1
C
Thus, if you can identify a five wave pattern inside Wave A of
any correction, you can then expect the correction to turn out as a
Simple
2
Zig-Zag formation.
(Zig Zag)
Fibonacci Ratios Inside A ZigZag Correction
Wave B = usually 50% of Wave A.
B
Wave B should not exceed 75% of Wave A.
Wave C = either 1 x Wave A
or 1.62 x Wave A
A
or 2.62 x Wave A
C
not to scale
Be alert for angle divergence
A simple correction
is commonly called
a Zig-Zag correction.
You typically see
divergence with the
Oscillator in a
simple correction.
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Applying Technical Analysis
Complex Corrections— Flat, Irregular, Triangle
The complex correction group consists of three different patterns: 1) Flat, 2) Irregular, and 3) Triangle.
FLAT
b
Flat Correction
In a Flat correction, the length of each wave is identi-
cal. After a five wave impulse pattern, the market
drops in Wave A. It then rallies in a Wave B to
the previous high. Finally, the market drops one
a
c
last time in Wave C to the previous Wave A low.
5
B
5
B
3
3
4
A
C
4
1
1
A
C
2
2
2
2
1
1
A
C
4
4
A
C
3
3
5
B
5
B
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Applying Technical Analysis
Irregular Corrections
In this type of correction, Wave B makes a new high. The final Wave C may drop to the beginning of Wave A, or below it.
5
B
3
B
5
IRREGULAR
3
C
A
4
OR
C
1
1
4
2
A
DOWNWARD
C
2
IRREGULAR
After 75% retracement, it is then
CORRECTION
considered a complex correction.
5
Fibonacci Ratios In An Irregular Wave
Wave B = either 1.15 x Wave A
or 1.25 x Wave A
Wave C = either 1.62 x Wave A
or 2.62 x Wave A
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Applying Technical Analysis
Triangle Corrections
In addition to the three wave correction patterns, there is another pattern which appears time and time again. It is called the Triangle pattern. The Elliott Wave Triangle approach is quite different from other triangle studies. The Elliott Triangle is a five wave pattern where all the waves cross each other. The five sub-waves of a triangle are designated A, B, C, D, and E in sequence.
5
3
b
d
e
1
c
a
4
2
Triangles are by far most common as fourth waves. One can sometimes see a triangle as the Wave B of a three wave correction. Triangles are very tricky and confusing. One must study the pattern very carefully prior to taking action. Prices tend to shoot out of the triangle formation in a swift “thrust”.
2
a
4
2
c
e
1
1
4
4
a
c
d
e
b
THRUST
3
3
5
d
3
b
5
5
When triangles occur in the fourth wave, the market thrusts out of the triangle in the same direction as Wave 3. When triangles occur in Wave B’s, the market thrusts out of the triangle in the same directions as the Wave A.
5
C
3
C
A
4
b
A
1
d
THRUST
5
b
d
3
2
c
e
e
4
c
a
a
B
B
1
2
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Applying Technical Analysis
Alternation Rule
If Wave Two Is A Simple
Correction, Expect
Wave Four To Be
A Complex Correction.
If Wave Two Is A
Complex Correction,
Expect Wave Four To
Be A Simple Correction.
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Applying Technical Analysis
Wave Measurements & Ratios
LENGTH OF EACH
The price distance of each wave is measured as a vertical distance
WAVE
from the beginning of the wave to the end of the wave. The length
INDICATED BY
is measured in price points or units.
LENGTH OF EACH
ARROW
1
Length of
Length of
2
1
Wave One
Wave Two
2
3
24170
Length of
LENGTH OF WAVE 3 =
3
Wave Three
24170 – 23560 = 610 PTS
1
23560
2
3
Length of
4
Wave Four
1
4
2
3
5
Length of
5
Wave Five
1
4
2
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Applying Technical Analysis
Fibonacci Ratios Of Waves
The first wave in an Elliott sequence is Wave 1. The measurement of Wave 1 is used to find ratios of other waves. These ratios are not rules, but guidelines in estimating the lengths of different waves. Prior to wave ratios, we need to discuss Fibonacci.
Fibonacci Ratio Background
Fibonacci ratios are mathematical ratios derived from the Fibonacci sequence. The Fibonacci sequence is the work of Leonardo Fibonacci around 1180ACE. The Fibonacci sequence is used in many applica-tions including engineering, space studies, stock market actions, and many other fields. This is all the information one needs as to the origin of the Fibonacci ratios, at least for trading purposes.
The most common Fibonacci ratios used in the stock markets are:
1 – 1.618 – 2.618 – 4.23 – 6.85 (multiples)
0.14 – 0.25 – 0.38 – 0.5 & 0.618 (ratios) The ratios used in this manual slightly deviate from the standard Fibonacci ratios listed below. These deviated ratios best fit the short-term wave pattern.
Ratios For Wave Two
Fibonacci Rules for Wave Two are as follows:
Wave 2 is always related to Wave 1
Common Ratios for Wave Two are:
Wave 2 = either, 50% of Wave 1
or,
62% of Wave 1
1
ave One
50% }of Wave 1
2 62%
Length of W
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Applying Technical Analysis
Ratios For Wave Three
Wave 3 is related to Wave 1 by one of the following:
Wave 3 = either 1.62 x length of Wave 1
or
2.62 x length of Wave 1
or
4.25 x length of Wave 1
The most common multiples are 1.62 and 2.62. However, if the 3rd Wave is an extended wave, then 2.62 and 4.25 ratios are more common.
3
4.25
X (times)
3
2.62
length
of Wave
3
1.62
1
1
2
Length of Wave One
Ratios For Wave Four
Wave 4 is related to Wave 3 by one of the following:
WAVE 4 =
either, 24% of Wave 3
or,
38% of Wave 3
or,
50% of Wave 3
3
The 24% and 38% are the most
X (times)
common ratios for Wave 4.
4
2 4 %
length
4
38%
of Wave 3
1
Length of Wave Three
2
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Applying Technical Analysis
Ratios For Wave Five
Wave 5 has two different relationships. Both are shown below.
•
If Wave 3 is greater than 1.62 or extended, then Wave 5 ratios are as follows: Wave 5 either =
Wave 1
or =
1.62 x Wave 1
or =
2.62 x Wave 1
5
3
4
1
5 based on length of 1
1
2
•
If Wave 3 is less than 1.62, Wave 5 ratios are as follows:
When Wave 3 is less than 1.62, the 5th Wave over-extends itself. From research, the ratio of Wave 5
will be based on the entire length from the beginning of Wave 1 to the top of Wave 3.