Strategies School / Classic Methods
Elliott Wave: The Five-Wave Impulse
Advanced ยท 10 min read
Learn the three rules of an impulse and how to trade the wave 3 and the correction.
What it is
Elliott Wave theory says trends move in five waves in the trend direction (1, 3, 5 are impulsive; 2 and 4 are corrections), followed by a three-wave correction (A, B, C).
Three core rules: wave 2 never retraces more than 100% of wave 1; wave 3 is never the shortest of waves 1, 3 and 5; wave 4 does not overlap wave 1 territory in a standard impulse.
Wave counting is subjective, so use invalidation levels. If a rule is broken, your count is wrong and you exit.
How to spot it
- Find a clear start of a trend and label wave 1.
- Expect a pullback for wave 2 that stays above the start.
- Wave 3 is often the strongest and longest. Look to join it after wave 2 ends.
- After wave 5, expect an ABC correction instead of buying more.
Trade plan
- Entry: At the end of wave 2 or wave 4, with a confirming reversal.
- Stop loss: Below the start of wave 1 (for wave 2 entries) or below wave 1 high (for wave 4 entries).
- Target: Wave 3: about 1.618 times wave 1. Wave 5: about equal to wave 1.
Common mistakes
- Wrong: Forcing a count to fit. Right: If a rule breaks, discard the count.
- Wrong: Trading without an invalidation level. Right: Always know where the count is wrong.
Pro tip: Use Elliott Wave to organise trades, not to predict the future. Pair it with structure and Fibonacci levels.
Quiz
- In a standard impulse wave 4: Answer: Does not overlap wave 1 territory. Overlap would invalidate the standard count.
- Wave 3 is never: Answer: The shortest of waves 1, 3 and 5. It cannot be the shortest.
- If a rule is broken you should: Answer: Discard the count and exit. Invalidation means the count was wrong.
Educational content, not financial advice. Diagrams are illustrations, not real market data.