Elliott Wave Theory is a powerful market analysis tool that helps traders understand price movements based on crowd psychology. It was developed by Ralph Nelson Elliott in the 1930s and is widely used in forex, stocks, and crypto trading.
The Core Idea
Markets move in repetitive wave patterns that reflect human psychology—alternating between bullish (impulsive) and bearish (corrective) phases.
Motive waves have a subdivision of five waves and always move in the same direction as the trend of one larger degree. The most poplar and common motive wave is an Impulse. Impulsive waves have five (5) subdivisions which are always labelled 1, 2, 3, 4, 5 Impulsive patterns occur in waves 1,3,5 and in corrective waves A and C. The sub-waves (1,3 and 5) of an impulsive wave are themselves motive.
Rules and Guidelines
- Wave 3 can never be the shortest impulse wave – among Waves 1,3 and
- Wave 2 cannot retrace to a new price low of wave 1
- Wave 4 never ends in the price area of Wave 1 except in diagonal
- Impulsive waves have five (5) subdivision and Waves 1, 3 and 5 are themselves impulse
- As a guideline, Wave three (3) shows the greatest thrust, except when Wave five (5) is an extended
- As a guideline, the internal wave structures of corrective Waves 2 and 4 should be different which is termed as
As a guideline Waves 2 and 4 often bounce off Fibonacci retracement levels
A diagonal triangle is a unique type of wave that occurs mainly in Wave 5 of an impulse wave C of a corrective pattern. It occurs at times when the proceeding move has gone too far, too fast and has run out of steam. A diagonal triangle is a motive pattern, yet not an impulse, as it has characteristics of one or two corrective structure.
Rules and Guidelines
- It is a five-wave structure.
- It has a sub-division pattern of 3-3-3-3-3.
- There is always an overlapping between Wave 4 and Wave 1.
- The channel lines of the Diagonals must converge.
- Wave 3 can never be the shortest impulse wave – among Waves 1, 3, and 5.
- As a guideline, the internal wave structures of corrective Waves 2 and 4 should be different.
A diagonal triangle is a motive pattern, yet not an impulse, as it has one or two corrective characteristics. In a leading diagonal, waves 1, 3, and 5 are all impulse waves or all corrective waves in the form of zigzags though exceptionally rare in its formation.
Rules and Guidelines
- Subwaves of Waves 1,3 and 5 subdivides into five (5)
- The subwaves sequence is 5-3-5-3-5
- Waves 2 and 4 are always zigzag
- Rarely formed at wave 1 of an impulse wave and at wave A of a
- All other guidelines remain the same as the Ending diagonal
Corrective waves are composed of a three (3) waves structure that retraces a percentage of a preceding move.
It trends in the opposite direction as the wave of one larger degree.
They are always labelled with letters. Waves 2, 4 and B are corrective waves.
Examples of Corrective Waves are:
- Zigzags
- Flats
- Triangles
- Double Three
- Triple Three
A zigzag is a three-wave corrective pattern that has two impulsive waves of a lower degree. Mostly, the pattern typically is a counter-trend formation and moves against the main trend. Its inception is mostly a sharp reversal and can be mistaken for impulse because of the momentum it shows
Rules and Guidelines
- It is composed of 3 waves.
- Waves A and C are impulsive waves, while Wave B is corrective.
- The sub-wave sequence is 5-3-5.
- The end of Wave B is noticeably lower than the origin of Wave A.
- Wave C must go beyond the end of Wave A.
- Wave C and Wave A are probably equal.
Flats are a very common form of corrective patterns, which generally shows a sideways direction. A flat correction differs from a zigzag in that the sub- wave sequence is 3-3-5. Flats corrections usually retrace less of preceding impulse waves than do zigzags. It occurs most in B waves, though also quite common in Waves 2 and 4.
Rules and Guidelines
- It is a three-wave (3) structure.
- Wave C is an impulsive wave, while Waves A and B are corrective.
- Wave A's move is reversed by Wave B and ends near the origin of Wave A.
- Wave C shouldn't retrace beyond the end of Wave A.
- Wave C and Wave A are probably equal.
This is a common variety of flat where Wave B goes beyond the (orthodox) end of the previous impulsive wave. Wave B of the 3-3-5 pattern terminates beyond the starting level of wave A, and wave C ends more substantially beyond the ending level of Wave A.
Rules and Guidelines
- It is a three-wave (3) structure.
- Wave C is an impulsive wave, while Waves A and B are corrective.
- Wave B retraces past the end of the prior impulsive wave, which is Wave A's origin.
- Wave C normally goes beyond the end of Wave A.
The running flat is a rare variation on the 3-3-5 pattern where wave B terminates well beyond the beginning of wave A as in an expanded flat, but wave C fails to travel its full distance, falling short of the level at which wave A ended. The forces in the direction of the larger trend are so powerful that the pattern becomes skewed in that direction
Rules and Guidelines
- It is composed of 3 waves.
- Wave C is an impulsive wave, while Waves A and B are corrective.
- Wave C must have a five (5) sub-wave sequence.
- Wave B retraces past the end of the prior impulsive wave, which is Wave A's origin.
- Wave C falls short of the level at which Wave A ended.
Triangles are overlapping five wave affairs that subdivide 3-3-3-3-3. They appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and vitality
Rules and Guidelines
- It is a five-wave structure labeled a, b, c, d, e.
- Waves D and A do overlap.
- Wave D cannot move farther than the origin of Wave C.
- Wave C cannot be the shortest wave.
- Sub-waves of the triangle have corrective wave structures.
- Wave A is the longest, while Wave E is the shortest.
- As a guideline, the sub-wave structures should alternate.
This is a reverse symmetrical triangle where the top is rising and the bottom declining. This is a triangle where the B wave exceeds the origin of A.
Rules and Guidelines
- It is composed of 5 waves labeled a, b, c, d, e.
- Wave D goes beyond the origin of Wave C.
- Wave C cannot be the shortest wave.
- Sub-waves of the triangle have corrective wave structures.
- Wave A is the shortest, while Wave E is the longest.
- As a guideline, the sub-wave structures should alternate.
A combination combines several types of sideways corrective patterns called “double threes” and “triple threes.” A double or triple three then is a combination of simpler types of corrections, including the various types of zigzags, flats and triangles. As with double and triple zigzags, each simple corrective pattern is labelled W, Y and Z. The reactionary waves, labelled X, can take the shape of any corrective pattern but are most commonly zigzags
Rules and Guidelines
- All sorts of corrective patterns can integrate as part of a larger corrective pattern.
- It follows the characteristics (rules and guidelines) of corrective patterns mentioned above.
- As a guideline, the occurrence of a triangle in a combination should happen at the end of the structure.
- Corrective patterns in a combination generally show alternation.
A diagonal triangle is a motive pattern, yet not an impulse, as it has one or two corrective characteristics. In a leading diagonal, waves 1, 3, and 5 are all impulse waves or all corrective waves in the form of zigzags though exceptionally rare in its formation.
Rules and Guidelines
- Subwaves of Waves 1, 3, and 5 subdivide into five (5) waves.
- The subwave sequence is 5-3-5-3-5.
- Waves 2 and 4 are always zigzag patterns.
- Rarely formed at Wave 1 of an impulse wave and at Wave A of a zigzag.
- All other guidelines remain the same as the Ending Diagonal.
