What is Elliott Wave Theory?

What is Elliott Wave Theory?

Elliott Wave Theory proposes that markets move in repetitive wave patterns driven by crowd psychology. A full cycle consists of five impulsive waves followed by three corrective waves.

Wave Structure

• Impulse waves: Waves 1, 3, and 5 move with the trend.
• Corrective waves: Waves 2 and 4 retrace portions of the prior move.
• A-B-C correction: A three-wave move against the trend.
• Fractals: Each wave subdivides into smaller waves.

Trader Tips

• Keep counts simple: Focus on clear impulsive and corrective patterns.
• Use guidelines: Wave 3 cannot be the shortest impulse, and Wave 4 should not overlap Wave 1.
• Integrate indicators: Momentum tools help validate wave strength.
• Plan contingencies: Maintain alternate wave counts in case the preferred scenario fails.

Practical Playbook

• Define context on higher timeframes, then execute on intraday charts.
• Wait for confirmation (acceptance, momentum, or confluence) before entry.
• Size positions conservatively and place stops at clear invalidation levels.
• Adapt to session dynamics; conditions shift between Asia, London, and New York.

Common Pitfalls

• Forcing trades without alignment across timeframe, structure, and catalyst.
• Ignoring spreads/slippage during news or thin liquidity.
• Moving stops or adding to losers instead of honoring the plan.

Illustrative Example

Build a simple playbook: identify bias, mark key zones/levels, define triggers and invalidation, and pre‑set targets for 2–3R. Journal results by session and setup to refine rules. Over time, consistency—not prediction—drives outcomes.

Practical Playbook

• Define context on higher timeframes, then execute on intraday charts.
• Wait for confirmation (acceptance, momentum, or confluence) before entry.
• Size positions conservatively and place stops at clear invalidation levels.
• Adapt to session dynamics; conditions shift between Asia, London, and New York.

Common Pitfalls

• Forcing trades without alignment across timeframe, structure, and catalyst.
• Ignoring spreads/slippage during news or thin liquidity.
• Moving stops or adding to losers instead of honoring the plan.

Illustrative Example

Build a simple playbook: identify bias, mark key zones/levels, define triggers and invalidation, and pre‑set targets for 2–3R. Journal results by session and setup to refine rules. Over time, consistency—not prediction—drives outcomes.