Elliott Wave Theory is a method of technical analysis based on the idea that market prices move in recurring patterns driven by investor psychology.
The Basic Pattern
Every market move consists of two phases:
| Phase | Waves | Direction | Psychology |
|---|---|---|---|
| Impulse | 5 waves | With trend | Optimism |
| Corrective | 3 waves | Against trend | Profit-taking |
Impulse Waves (5-3-5-3-5)
Price
/\
/ \ /\
/ \ / \
/ \/ \
1 2 3 4 5
- Waves 1, 3, 5 move with the trend
- Waves 2 and 4 are corrections
- Wave 3 is usually the longest and strongest
- Wave 4 should not overlap Wave 1
Corrective Waves (5-3-5)
Price
/\
/ \
/ \
A B C
- Waves A and C move against the trend
- Wave B is a counter-trend bounce
- Forms after the 5-wave impulse
Wave Character
| Wave | Psychology |
|---|---|
| Wave 1 | Early adopters buy, most are sceptical |
| Wave 2 | Profit-taking, but doesn’t retrace fully |
| Wave 3 | Widespread recognition, highest volume |
| Wave 4 | Consolidation, “it’s over” sentiment |
| Wave 5 | Euphoria, latecomers jump in |
Wave Rules
| Rule | Description |
|---|---|
| Wave 2 can’t retrace Wave 1 fully | Never beyond 100% |
| Wave 3 is never the shortest | Usually the longest |
| Wave 4 doesn’t overlap Wave 1 | In most cases |
Common Patterns
Extension
When one of the impulse waves (usually Wave 3) is significantly longer than the others.
| Extension | Frequency |
|---|---|
| Wave 3 extension | Most common (90%) |
| Wave 5 extension | Less common |
| Wave 1 extension | Rare |
Diagonal
A wedge-shaped pattern where Waves 1, 2, 3, 4, 5 all contain overlapping sub-waves.
| Type | Location |
|---|---|
| Leading diagonal | Wave 1 or A |
| Ending diagonal | Wave 5 or C |
Zigzag (5-3-5)
A sharp corrective pattern that goes deep against the trend.
Flat (3-3-5)
A sideways corrective pattern with less depth.
Triangle (3-3-3-3-3)
A converging sideways pattern, usually Wave 4.
Common Mistakes
| Mistake | Fix |
|---|---|
| Forcing waves where none exist | Not every move is Elliott |
| Counting on low timeframes | Works better on daily+ |
| Ignoring the rules | If rules are broken, it’s not Elliott |
| Using alone | Combine with Fibonacci and volume |
Fibonacci and Elliott
Elliott Wave and Fibonacci are closely related:
| Relationship | Fib Level |
|---|---|
| Wave 2 retracement | Often 50%, 61.8% |
| Wave 4 retracement | Often 38.2% |
| Wave 3 target | 161.8% of Wave 1 |
| Wave 5 target | 161.8% of Wave 1 |
Bottom Line
Elliott Wave Theory provides a framework for understanding market structure, but it’s subjective and takes practice. Start by identifying basic 5-wave impulse patterns on daily charts. Don’t force counts where they don’t fit. Combine with Fibonacci levels for targets and use strict risk management. Most importantly, if the rules are broken, your count is wrong.