Elliott Wave for Advanced

Users
By Jeremy Wagner, CEWA-M - Head Forex Trading Instructor

[email protected] & https://twitter.com/JWagnerFXTrader

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Elliott Wave For Advanced Users

In the 1930s, Ralph Nelson Elliott discovered that freely traded markets are patterned. More
specifically, he discovered that moves in the direction of the larger trend unfold in five waves and that
moves against the larger trend (corrections) unfold in three waves.

Elliott studied multiple time frames, ranging from yearly to half-hourly, of the Dow Jones Industrial and
Dow Jones Transport indexes. He found the same patterns, regardless of time frame. This concept,
that a market exhibits a similar structure at all degrees of trend (much like tree, which is made up of
smaller versions of itself), would later come to be known as fractal (see Figure 1).

Although initially concentrated on stock markets, Elliott expanded his study to various commodities
markets and found the same patterns! He wondered why markets that are supposedly driven by
different outside events would exhibit the same patterns. The answer is that market trends are not a
product of outside forces, but are instead a product of human psychology, which follows the wave
principle.

FIGURE 1: The basic 5-3 pattern is evident at all degrees of trend

This advanced guide expands on the basic Elliott Wave guide by presenting in more detail the patterns
that Elliott discovered.

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Motive Waves

Movements in the direction of the trend of one larger degree trend unfold in 5 waves are referred to
as motive waves. There are two types of motive waves (Impulse and Diagonals).

Notice in Figure 1 that waves 1, 3, 5, A, and C each divide into 5 waves. These waves are with the
trend of one larger degree, which divide into 5 waves. On the other hand, waves 2, 4, and B divide into
3 waves because these waves are against the trend of one larger degree. All motive waves obey 2
rules.

1.) Wave 2 never retraces more than 100% of wave 1

2.) Wave 3 is never the shortest wave between waves 1,3, 5

Impulse

Impulse waves are the most common type of motive wave. In an impulse, wave 4 does not enter into
the price territory of wave 1 (although in FX, with the high degree of leverage, you may see overlapping
on intraday charts; but rarely).

Within strong trends, price may extend.

Typically, wave 3 is the extended wave, but it
may also appear as wave 1 or 5. You usually see
only one wave that is extended, or unusually
long compared to the other motive waves.

Figure 2: One of waves 1, 3, or 5 is always

extended

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Diagonals

Diagonals are known to traditional chartists as

wedges. A diagonal is most common in the 5th
wave position that follows an especially strong
3rd wave. In such instances, the pattern is
referred to as an ending diagonal. In an ending
diagonal, each wave (1,2,3,4,5) consists of 3 wave
zigzags and waves 2 and 4 can overlap.

Figure 3: An ending diagonal in the 5th wave

position following an especially strong 3rd
wave

Reversals from ending diagonals are sharp and

the entire diagonal is usually fully retraced. The
position is initiated near the line that connects
waves i and iii (this estimates the end of wave v).
If wave iii is shorter than wave i (which is common
in a contracting diagonal), then place the initial
stop at a distance where wave v equals in length the distance in wave iii. This is because if the wave
labeling is correct, wave iii should not be the shortest of waves i, iii, v.

Note: Diagonals can also appear in the wave 1 position and follow similar guidelines as the ending
diagonal.

Triangles

Triangles are common as 4th waves, B waves (and X waves…see combinations). The pattern consists of
five overlapping (and usually contracting) waves labeled A, B, C, D, and E. Each one of these waves is
composed of three waves. Two type of subwaves appear in triangles, zigzags (including multiple
zigzags) or triangles. One of the five legs of the triangle can be a triangle itself, but you won’t find two
or more legs of the triangle carving a triangle.

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Figure 4: Detailed structure of a triangle (left), a triangle as a B wave (middle), and a triangle as a 4th wave
(right)

At the beginning of the triangle, the trader does not know that the pattern unfolding is actually a
triangle. Towards the end of the triangle, the pattern is quite clear and the trader can position for the
wave that will succeed the triangle (5th wave, C wave, or Y wave). Positions are initiated near the end
of wave E and a stop is placed below wave C.

Zigzags

Zigzags are common as 2nd waves and B waves. The pattern

consists of three waves and is labeled A-B-C. Waves A and C are
composed of five waves (motive waves) and wave B is composed
of 3 waves (correction).

Zigzags can appear in both bull and bear markets.

Figure 5: A bull market zigzag (bull market because the zigzag is

down, against the larger trend)

Flats

Flats occur commonly as 4th waves and B waves. The pattern is labeled the same as a zigzag, A-B-C,
but the compositions of the subwaves differ from that of a zigzag. While a zigzag’s divisions are 5-3-5, a
flat’s divisions are 3-3-5. Wave A is just in 3 waves. Wave A is weak (only 3 waves), therefore wave B
terminates near or beyond the origin of wave A. Wave C will typically end just beyond the end of wave
A. There are 3 kinds of flats. Regular, expanded, and running. Expanded flats are actually more
common than regular flats and running flats are rare.

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Figure 6: A regular flat (left), an expanded flat (middle), and a running flat (right) Combinations (complex
corrections)

Prolonged sideways / corrective action is the

result of a combination, also termed a complex
correction. A complex correction is 2 or 3 (but
no more than 3) corrective patterns connected
by an X wave(s). The first and third patterns are
labeled W and Y. In a triple combination, there
is a fifth pattern that is labeled Z.

Figure 7: A double zigzag (2 zigzags connected

by a 3 wave movement known as an X wave. A
triple combination would have another X wave
connecting waves Y and Z.

Trading with Elliott

There is much more to wave analysis than what has been presented here. Anything that is worth
learning takes time. The wave principle is no different. Successful application requires a good deal of
practice. This introduction should help you get started.

Jeremy Wagner is a Certified Elliott Wave Analyst (CEWA-M). Follow his articles and webinars for
current market analysis using Elliott Wave Theory:

https://www.dailyfx.com/authors/bio/Jeremy_Wagner

Ready to put your new knowledge to work?

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