Elliott Waves Theory
Forty Fifth session of Forex Training
Welcome back to Forex professional training in financial markets.
In this session Elliott Waves Theory will be studied in details.
Elliott Waves theory is frequently exploited in technical analysis. This theory is based on the universal orders and systems.
Human beings are a part of the Universe, thus human behaviour is derived from the system of our Universe.
Consequently, Elliott Waves applies the universal order on financial markets to predict future market trend and price.
Elliott Waves includes 5 major and 3 corrective swings. Numbers 3, 5 and 8 are available on Fibonacci sequence.
The major swings are 1, 2, 3, 4, 5 while A, B and C are corrective swings in which B has agreeing direction with the major trend.
Numbers 1, 3 and 5 are the major swings with agreeing direction to major trend, while numbers 2 and 4 are reversal major swings.
Swings 1, 3, 5, B are agreeing and swings 2, 4, A and C are reversal. Elliott Waves trend can be smooth, rippling or a zigzag.
Each swing can include an Elliott Waves pattern in its structure, too.
For instance, in this graph there are 34 swings. 34 is a Fibonacci number, too.
Swings can be classified into 9 categories on the basis of their size and timeframe.
- Grand Super Cycle: Multi century
- Super Cycle: Multi decade
- Cycle: one year or several years
- Primary: A few months or several years
- Intermediate: Weeks to months
- Minor: Weeks
- Minute: Days
- Minuette: Hours
- Subminuette: Minutes
The major Elliott Waves conditions are:
- 2nd swing must not reach starting point of the 1st swing
- 4th swing must not reach staring point of the 3rd swing
- 3rd swing must touch higher price than the 1st swing in Bullish format
- 3rd swing must touch lower price than the 1st swing in Bearish format
- 3rd swing cannot be shorter than 1st and 5th swing, while it is frequently the longest swing
- 4th swing must not reach the end point of 1st swing
Swings number 1, 3 or 5 can extended by sub-swings.
The extended swing has 5 sub-swings with Elliott Waves pattern, which are detectable on the timeframe of the main Elliott Wave swings.
Frequently, the 3rd swing has an extension in its structure. Left graph shows the extension has occurred on the 1st swing.
Middle graph illustrates the extension on the 3rd swing, while the right graph displays extension on the 5th swing.
Even if a trader could not detect the extension and main swings, he/she can consider the whole 9 swings on the analysis.
Extension can occur on sub-swings, too.
Sometimes swing number 5 lags behind the 3rd swing high point, due to a rapid gradient of the 3rd swing.
Thus, traders can consider the 3rd and the 5th swing as a Double Top pattern, which produces Sell signal.
If the 5th swing includes 5 sub-swings and those sub-swings do not have Elliott Waves pattern, then a trader can consider the swings as a Triangle pattern.
As a trend crosses breakout point, a Sell order on a Bullish trend and a Buy order on a Bearish trend can be placed.
Frequently, each major swing will include 3 sub-swings to form a Triangle pattern which may sometimes be divergent.
Most of the time, one of the 2nd or the 4th swing may have a complex shape and structure.
A trader can connect the end points of the 1st swing and the 3rd swing by a Trendline, then a parallel line can be placed on a starting point of the 2nd swing.
Hence, the 4th and the 5th swings can be speculated considering this channel.
If the 4th swing does not form on the defined line, whether higher or lower, a trader can draw a Trendline from the 2nd swing end point to the 4th swing end point, then place a parallel line with this Trendline on the 3rd swing end point to predict the 5th swing end point.
The corrective swings refine the market price and moves against the major swings.
Corrective swings require more consideration due to their complexity. There are three types of corrective swings:
A zigzag pattern, 5-3-5, is a downward trend on an uptrend, thus it is a reversal pattern.
On a Bearish trend this pattern will have an upward direction.
2 or 3 zigzag patterns can be detected in a trend if there is any sub-swing pattern. The first trend is W followed by X and Y trends.
Flat is another type of a corrective swing, 3-3-5, in which swings are named A, B and C.
C has higher price rather than A, which shows less tendency to refine main swings.
Frequently, this type is after strong and vigorous latest major swings, numbers 1, 3 and 5.
A special type of flat format is formed after the swing B is closed higher than the 5th swing and the swing C is lower than the swing A in a Bullish trend.
In a rare conditions B may be closed over the 5th swing while the C end point is higher than the A end point.
Triangle pattern, 3-3-3-3-3, has 5 consecutive 3-set corrective swings that sub-swing may not have corrective pattern.
Just like a Triangle pattern, the consecutive waves and swings forms symmetrical, Descending, Ascending and Reversal Symmetrical triangle formats.
Swings are named A, B, C, D and E. Since these forms are continuation patterns, they are present on corrective patterns.
Wave B must be larger and longer than the wave A. Sub-swings can have Zigzag or Flat format.
Triangle patterns would be created after B or the 4th wave is formed.
The Triangle format may have 9 swings, thus trend will form after a longer time.
There is a format in which some corrective swing types are combined with each other.
The combination can consist Zigzag, Flat and Triangle concurrently.
While there can be multiple Flat patterns, only one Triangle pattern can form which will be the last pattern of this combination.
A short combination pattern has WXY points, while a longer format has WXYXZ points.
Elliott Waves is a complex and difficult pattern that require sound knowledge and experience acquired over several years of practice.
Specifying points must be done on longer timeframes, thus sub-swings can be determined in shorter timeframes.
The most important issue on detecting Elliott Waves patterns is the ability in specifying swings and points.
There are multiple websites providing useful Elliott Waves materials on the internet such as Elliottwave.com.
That concludes this session, until next time and another session take care.