The Elliott wave principle technique is a popular analysis technique in stock investing. The Elliott wave principle technique is quite similar to the Dow theoretical technique but goes into a detailed analysis of the cyclical structure of the price trend.
This technique helps to identify what stage of the cycle the market is in to predict price changes. That means the price is in which wave of the Elliott wave, thereby predicting the next moves of the market and trading accordingly.
In this article, I talk about the basic content of the Elliott wave principle technique, structure, formation conditions, and some Elliott wave patterns.
1. Elliott wave principle.
The Elliott wave principle technique is based on the view that “the result of the movement of the crowd psychology is the formation of patterns and trends of prices in the market”. The principle is that the psychology and behavior of the crowd occur naturally but often follow a certain cycle, sometimes euphoric, sometimes pessimistic, so its result is price movements as well as price movements. will follow the same cycles, rising and falling. These up-and-down cycles are all defined by distinct patterns called waves and are repeated.
2. Elliott wave structure.
A basic complete Elliott wave structure consists of 8 waves with 2 main phases, the trend phase, and the correction phase. The first phase is the main trend phase consisting of 5 waves numbered 1 to 5. The second phase is the correction phase of the main trend consisting of 3 waves marked A, B, and C.
Each phase is divided into two types of waves, phase-corrected, and phase-corrected waves. Phase 1, waves 1, 3, and 5 are phased waves, and waves 2, and 4 are phase correction. In the second phase, waves A, and C is the phase wave, and wave B is the phase correction wave.
3. Conditions of formation.
The determined waves must ensure the following conditions:
- Waves 1, 3, 5, A, and C must trend in their phase.
- Waves 2, 4, and B must tend to correct with their phase.
- Wave 2 is in the price zone of wave 1 and wave 3.
- Wave 3 must not be the shortest of the 3 waves 1, 3, 5.
- Wave 4 is in the price zone of wave 3, and wave 5 and must not enter the price zone of wave 1.
- Waves A, B, and C are usually smaller than waves 1, 2, 3, 4, and 5 in both magnitude and formation time.
- Wave B is in the price zone of wave A and wave C.
In addition, the Elliott wave principle states that each Elliott wave is a small wave within a larger Elliott wave. That is, one wavelength of an Elliott wave is composed of a complete Elliott wave. From there, the Elliott wave is divided into levels including:
- Extreme Cycles: The duration can last from a few decades to a century.
- Supercycle: Usually lasts from a few years to several decades.
- Major Cycle: Usually lasts from a year to several years.
- Fairly large cycle: Usually lasts from a few months to a year.
- Normal cycle: Usually lasts from a month to several months.
- The cycle is quite small: Usually lasting from a week to a month.
- Small cycle: Usually lasts for a few days to a week.
- Micro-cycles: Usually last from a few hours to a few days.
- Micro-cycles: Within minutes to hours.
4. Elliott wave patterns.
The Elliott wave pattern is divided into two main phases:
4.1. Follow the main trend.
With the main trend phase, the Elliott wave offers several patterns including:
Extended wave pattern:
The extended wave pattern is within a small wave consisting of one or more subphases in the same direction as that phase trend.
The extended waveform usually appears in waves 1, 3, and 5, or waves A, and C with a trend-following phase pattern.
Triangle wave pattern:
A triangle wave pattern is a pattern where the line connecting the tops intersects the line connecting the troughs forming a triangle. In which, waves 1, 3, and 5 are parallel to each other.
The triangle wave pattern usually appears in wave 1 and wave A.
Wave-5 truncated pattern:
Wave-5 truncated pattern is a pattern where waves 5 and 4 have similar price movements. That is, the crest of wave 5 is equal to the crest of wave 3.
Wave-5 truncated pattern usually appears only in wave C with a trend-following phase pattern.
4.2. Adjustment phase.
With the correction phase, the Elliott wave presents several patterns including:
Zigzag wave pattern:
A zigzag pattern is a pattern where the line connecting the tops is parallel to the line connecting the bottoms.
The zigzag pattern usually appears only in waves 2 and A with a corrective phase pattern.
- Wave A’ is parallel to and equal to wave C’. Wave A” is parallel to and equal to wave C”.
- Wave B’ does not exceed 2/3 of wave A’. Wave B” does not exceed 2/3 of wave A”.
Triangle wave pattern:
The triangle wave pattern in the correction phase is similar to the triangle wave pattern in the main trend phase. But only appear in wave 4 and wave B.
Flag wave pattern:
The flag wave pattern is similar to a zigzag pattern but when the line connecting the tops is parallel to the line connecting the bottoms. But these 2 parallel lines tend to go sideways.
The flag wave pattern usually appears only in wave 2, wave 4, and wave B.
- Wave A’ and wave B’ follow a corrective phase pattern. Wave C’ follows a trend-following phase pattern.
- Wave A’, wave B’ and wave C’ have similar volatility.
Above are the basic contents of the Elliott wave principle technique. This technique can help determine what stage of the cycle the market is in to predict price changes by price zone. For use in trading, investors often combine the Elliott wave principle with the Fibonacci sequence to predict the range of price movements.
Hope you get the basic knowledge and effectively use the Elliott wave principle technique in your trading.