Elliott Wave Theory: Taking the Simplest One

According to Elliott wave theory of price movements on the е can be conventionally divided into two types of wave cycles: five-wave (1-2-3-4-5) cycles (see Fig. 1) or three-wave (A-B-C) cycles (see Fig. 2).

Fundamentals of Wave Theory

Figure 1. Example of a 5-wave cycle.

Figure 2. Example of cycle A-B-C.

This raises legitimate questions: why the number of works on wave analysis is growingif there are only TWO (!) directions on it - UP or DOWN, and the trader only needs to open a trade in the right direction (out of two)? How to see in REAL time modewhat kind of correction now: flat, triangular, or something else? How to understand whether the wave was truncated or it was an X wave in a double zigzag? All the markup can be easily seen on the chart after the fact: it is easy to find the five-wave impulse, where the 5th impulse wave became truncated and could not break through the top of the 3rd wave (yes, there is such an element in wave analysis, about it below), but how to do it during the development of the structure?

In this article I would like to offer you a simplified model (only part of it, expect the continuation in the next issues of ForTrader.org), where there are no "wrong" elements and where each wave, even in correction, has its own criteria, simple and visible to everyone trader.

Five-wave cycle

So, first of all, let's analyze the main element of Elliott's wave theory: the five-wave cycle. Five-wave cycle (see Figure 1) consists of three impulse waves (labeled with odd numbers 1, 3, and 5) and two correction waves (labeled with even numbers 2 and 4). Briefly about the criteria of each wave:

1)    Волна «1» — impulse, is the beginning of a new trend on the timeframeThe wave is the one you fix it on (you "fix" it in real time, not find it on the history). The bullish wave "1" as

go beyond the base of wave "1".

3)    Волна «3» — impulse, the longest in the 5-wave cycle, it breaks the top of the previous impulse "1".

4)    Wave "4" — коррекционная к волне «3». Ее главный критерий: чтобы иметь право называться «4-й», она НЕ должна заходить ниже вершины волны «1» или откатить больше, чем на 50% от волны «3». Если хотя бы один из этих критериев не выдерживается, то весь цикл подволн на данный момент не имеет право называться 5-волновым, т.к. «4-я» волна не соблюдает необходимых для того условий.

5)    Wave "5", the last impulse in the 5-wave cycle, interrupts the top of wave "3".

You can easily find points 1-4 in the literature on wave analysis. But the description of the 5th wave, for example, in the book by Frost and Prekter, personally raises the most questions for me. According to the authors, the 5th wave may be truncated, i.e. it may NOT interrupt the top of the 3rd wave. But in this case the main postulate of wave analysis is violated: the impulse is always longer than the correction! It turns out that the 5th wave is shorter than the corrective 4th wave.

Figure 3. Example of a truncated 5th wave by Frost and Prekter.

This little nuance is often confusing. And imagine how many times we have to change the markings on the chart if the 5th turns out to be truncated. It takes time and effort, and we just need to take the movement in the right direction.

Since it is hard to tell in real time whether the 5th was truncated or not, we can try to abandon the truncated waves and make the pulses longer than the previous corrections, or at least equal to them.

Fig. 4. We take as a basis the absence of truncated 5-waves.