Elliott Wave Theory: Taking the Simplest One (Continued)

In this article, we will continue to look at Elliott Wave Theory in relation to market . В first parts We have considered the classic five-wave pattern, described the properties of each wave, and also touched upon some difficulties that may arise when defining waves on the price chart in real time. The biggest inconvenience can be caused by the definition of truncated impulse waves, because online such a wave can be very confusing and eventually become an impulse in the opposite direction from the old trend. The topic of this article is ABC three-wave cycle и its difference from the five-wave 1-2-3-4-5 cycle..

About the three-wave ABC cycle

The criteria for each of the three waves in the ABC cycle do not differ much from the properties of the waves of the 5-wave cycle. So, in order:

1)        Wave "A" is impulsive. It is possible to know for sure that wave "A" is in progress at the moment when it breaks the last minimum after the bullish trend, i.e. the starting point of the last impulse wave. And since the start of the last impulse wave is broken, the bullish trend is over. After the end of bullish trend there are only two possibilities: а) entering the ABC correction or б) a bearish trend reversal. You can also take a look at the first part of the article, which describes the properties of impulse wave "1" (see issue 54 of ForTrader.org, article "Wave Theory: Taking the Simplest" - ed. note).

2)        Wave "B" is a correction to wave "A". In order to remain corrective and be labeled "B", this wave must not break the base of the impulse wave "A" that preceded it. Otherwise, the counting of the sub-wave cycle starts again: the wave, which could become a corrective "B", when breaking through the base of "A" itself becomes a new impulse wave "A" (or wave "1" - we will learn about the difference between "A" and "1" later, when we start the 4th wave). As long as the first three waves (ABC or 1-2-3) are in progress, we do not care at all in which cycle they will be components, as their criteria are the same. Therefore, we can label them as follows: either start with "A", or label it as "1", or all together "A/1". The essence of the incipient wave, in which we label sub-waves in this way, does not change from this.

3)        Wave "C" is the answer to all questions. It is an impulse that breaks the top of wave "A". There may be a nuance - whether to consider a one-point touch of the level of the top of wave "A" as a breakthrough or not? Over time, I became convinced that this variant has the right to exist, i.e. the exact working off of the level of the top of wave "A" by wave "C" is still its breakout - and the markup after the reversal and leaving after "C" for a new "A" is still ABC!

Wave "C", as you noticed, may be shorter than wave "A", i.e. not the longest impulse in this subwave cycle. Whether to make a breakdown into truncated and non-truncated waves is your right, as any markup of waves is just a model (!), not a real device.

Figure 1. An example of a three-wavelength waveform.

We will know that the wave "C" is in progress when the price reaches the level of 1.5066, i.e. the top of the impulse wave "A" is broken.

Now for the difference between ABC and the 5-wave cycle.

On the 4th wave we read: wave "4" is a correction to wave "3". Its main criterion: to have the right to be called "4th", it must NOT go below the top of wave "1" or roll back more than 50% from wave "3". If at least one of these criteria is not met, then the entire sub-wave cycle at this point does not qualify to be called a 5-wave cycle, because the "4th" wave does not meet the necessary conditions.

Take a look at Figure 2, and you will see that the downward price hike does not fit within the 4th wave, so the ABC subwave cycle is fixed (without any conventions!) as completed. The downward hike has broken both 50% from the supposed third (which remains "C") and the top of wave "A". Therefore, we consider that some higher level wave (let's call it "A") is finished, and a wave of the same higher level under the letter "B" (or 2nd) has gone down.

Fig. 2. An example of the insolvency of a 5-wave figure.

Now you see how easy it is to distinguish a 3-wave subwave cycle from a 5-wave cycle in real time.