Elliott Wave Theory is a powerful technical analysis tool that reveals how market prices move in predictable patterns due to crowd psychology. Here’s a quick summary of the key points:
🌊 Elliott Waves Are Fractals
- Each wave consists of smaller waves, showing self-similarity — a core property of fractals.
- This pattern repeats across all timeframes, from minutes to centuries.
📈 The 5-3 Wave Structure
Markets move in a 5-wave impulse followed by a 3-wave correction:
- Impulse Waves (1, 3, 5) follow the trend.
- Corrective Waves (2, 4) move against the trend.
- Corrective patterns are labeled as A-B-C.
- Among the impulse waves, Wave 3 is usually the strongest and most extended.
🔁 Internal Wave Structure
- Impulse Waves (1, 3, 5) contain smaller 5-wave patterns.
- Corrective Waves (2 and 4) consist of smaller 3-wave patterns.
🔺 3 Basic Corrective Patterns
Although Elliott identified 21 variations, they all fall under these main categories:
- Zig-Zag – Steep corrections with clear A-B-C moves.
- Flat – Sideways corrections with roughly equal wave lengths.
- Triangle – Converging or diverging corrective structures.
📏 The 3 Cardinal Rules
When labeling Elliott Waves, always follow these strict rules:
- Wave 3 can NEVER be the shortest impulse wave.
- Wave 2 can NEVER retrace past the start of Wave 1.
- Wave 4 can NEVER enter the price territory of Wave 1.
🧠 Final Tip: Practice Makes Perfect
The forex market rarely moves in perfect wave formations. Reading and labeling Elliott Waves accurately takes consistent practice and time.
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