Good Trade – Bad Trade

When I first discovered the Wave Principle, I was immediately impressed with how accurately it could position the trend at an early stage, and across numerous time frames.

Yet as powerful as that was for a trend follower like myself, it didn’t end with this.

I was also able to project market turns with a great degree of accuracy.

This week’s article is the start of a three-part series on Elliott Wave basics.

The series will cover things like core rulings, fractal geometry, calculating price projections, pattern analysis, trends and turning points, plus Fibonacci relationships and risk reduction.

At its most basic level, Elliott Wave Analysis is simply the identification of patterns within price action.

Yes, this method is discretionary. However, done correctly we must abide by 3 strict core rules as well as 3 broader guidelines. 

The 3 strict core rules are:

1) Wave-2 cannot trade below the start of Wave-1
2) Wave-4 cannot trade into any part of Wave-1
3) Wave-3 cannot be the shortest wave impulsive wave

The 3 guidelines are:

1) The Wave most likely to extend the furthest is Wave-3, with the next most likely being the Wave-5.
2) Wave-2 is generally sharp, deep and zig zag in form, whereas Wave-4 tends to move sideways, more shallow and usually more complex.
3) Three wave corrections following an impulsive wave can often terminate within the zone of the previous Wave-4 of a lesser degree.

These 6 aspects of Elliott Wave Analysis are crucial to know and understand.

Patterns exist in many of our natural systems; from weather to geography to botany.

These systems go through structured and systematic periods of growth, non-growth and even decline.

The patterns then build on themselves and subdivide into even larger sizes over and over again.

This is known as fractal geometry.

It’s also the basis of the model R.N Elliott identified many decades ago when looking at financial markets.