Summary: Elliott Wave Theory

Here’s a summary of what we covered regarding the Elliott Wave Theory:

Elliott Waves are fractals.

• Each wave can be split into parts, each of which is a very similar copy of the whole. Mathematicians like to call this property “self-similarity”.

A trending market moves in a 5-3 wave pattern.

• The first 5-wave pattern is called impulse wave.
• One of the three impulse waves (1, 3, or 5) will always be extended. Wave 3 is usually the extended one.
• The second 3-wave pattern is called a corrective wave. Letters A, B, and C are used instead of numbers to track the correction.
• Waves 1, 3 and 5, are made up of a smaller 5-wave impulse pattern while Waves 2 and 4 are made up of smaller 3-wave corrective patterns.
• There are 21 types of corrective patterns but they are just made up of three very simple, easy-to-understand formations.
• The three fundamental corrective wave patterns are zig-zags, flats, and triangles.

Three Cardinal Rules

There are three cardinal rules in Elliott Wave Theory when labeling waves:

Rule Number 1: Wave 3 can NEVER be the shortest impulse wave

Rule Number 2: Wave 2 can NEVER go beyond the start of Wave 1

Rule Number 3: Wave 4 can NEVER cross in the same price area as Wave 1

If you look hard enough at a chart, you’ll see that the market really does move in waves.

Because the forex market never moves in a textbook-perfect fashion, it will take many, many hours of practice analyzing waves before you start to get comfortable with Elliott waves.

Stay diligent and never give up!