Elliott Wave Theory
Ralph Elliott observed that crowd psychology moves markets in repetitive wave patterns. Price advances in a 5-wave 'motive' sequence in the direction of the trend, then corrects in a 3-wave sequence against it. The same 5-3 shape repeats at every degree, from minutes to decades.
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Wave 1 — The start
The first push higher. Often weak and doubted; only a minority sees the trend beginning while most still expect the prior move to resume.
Wave 2 — First pullback
A correction of wave 1 (often 50–61.8%). Sentiment is still bearish, but it never falls below the start of wave 1.
Wave 3 — The powerhouse
Usually the longest and strongest wave, driven by broad recognition of the trend. It can never be the shortest of the three impulse waves.
Wave 4 — Rest
A shallow, often complex correction (typically ~38.2%). It never overlaps the price territory of wave 1.
Wave 5 — The finale
The last push, driven by the crowd and late buyers. Often shows weakening momentum and divergences that warn of the coming reversal.
Wave A — First drop
The initial move against the trend. Often mistaken for a simple pullback while the uptrend is actually ending.
Wave B — The trap
A bounce that partially recovers wave A. It fools latecomers into thinking the trend has resumed ('bull trap').
Wave C — Capitulation
A strong, broad move that usually exceeds the end of wave A, confirming the correction and often ending in capitulation.
Wave 2 never retraces 100% of wave 1
If price falls below the origin of wave 1, the count is wrong — it is not wave 2.
Wave 3 is never the shortest
Among waves 1, 3 and 5, wave 3 can be the longest or the middle one, but never the shortest. It is often the longest.
Wave 4 never overlaps wave 1
The low of wave 4 must not enter the price range of wave 1 (in a standard impulse). If it does, recount.
Zigzag (5-3-5)
A sharp, deep correction. Waves A and C have five sub-waves; B is short. The most common single correction.
Flat (3-3-5)
A sideways correction where A, B and C are roughly equal. Signals a strong underlying trend that resumes afterwards.
Triangle (3-3-3-3-3)
A converging five-wave (A-B-C-D-E) consolidation, usually in wave 4 or B. Precedes a final thrust in the trend direction.
The guideline of alternation
Beyond the three rules that cannot be broken, Elliott left a guideline that tidies up a count considerably: corrections within the same impulse tend to alternate. If wave 2 was deep and fast, wave 4 will usually be sideways and drawn out; if wave 2 was a simple zigzag, wave 4 tends to be a complex structure, and vice versa. It is not a rule — it does not invalidate a count — but it is an expectation: when two corrections of the same degree look too much alike, it is nearly always a sign that one of them is mislabelled. Alternation applies to depth and to time separately, so a shallow wave 2 that was also brief tells you to expect a wave 4 that is deeper, longer, or both — which is useful precisely because wave 4 is where most counts fall apart.
Fibonacci relationships
Waves relate through Fibonacci ratios: wave 2 often retraces 50–61.8% of wave 1; wave 3 extends 161.8% of wave 1; wave 4 retraces ~38.2% of wave 3; wave 5 often equals wave 1 or 61.8% of waves 1–3. These ratios help project targets and validate a count.
Wave degrees
The same 5-3 structure repeats at every scale (fractal): Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette and Subminuette. A wave 3 on the daily chart is itself made of five smaller waves on the hourly chart.
