Elliott Wave Theory
5-wave impulse and 3-wave correction patterns
Elliott Wave Theory states markets move in predictable wave patterns reflecting collective psychology.
Impulse waves (5 waves with the trend): - Wave 1: Initial move, often weak - Wave 2: Correction (never retraces more than 100% of Wave 1) - Wave 3: Usually the strongest and longest - Wave 4: Shallow correction (never enters Wave 1 territory) - Wave 5: Final push, often shows divergence
Corrective waves (3 waves against the trend): - Wave A: First correction move - Wave B: Counter-trend bounce (often a trap) - Wave C: Final correction, often equals Wave A length
Fibonacci relationships: - Wave 2 typically retraces 50-61.8% of Wave 1 - Wave 3 often extends to 161.8% of Wave 1 - Wave 5 often equals Wave 1 length
Pro tip: If you can identify Wave 3, you've found the most profitable part of the move.
Common mistake: Trying to count every single wave on every timeframe. Better: Focus on identifying clear wave structures on higher timeframes only.
Key takeaways
- 5 impulse waves + 3 corrective waves
- Wave 3 is usually strongest
- Wave 2 never retraces 100% of Wave 1
- Use Fibonacci for wave targets
Quiz
- Which Elliott wave is typically the strongest? Answer: Wave 3. Wave 3 is usually the longest and most powerful impulse wave.
Educational content, not financial advice.