Elliott Wave Theory is a form of technical analysis developed by Ralph Nelson Elliott in the 1930s. It posits that financial markets (stocks, forex, crypto, etc.) move in repetitive, predictable fractal wave patterns driven by collective investor psychology — cycles of optimism (greed) and pessimism (fear) create recurring structures on all timeframes.

Core Structure — Markets alternate between:

•  Motive (Impulse) waves → Move in the direction of the main trend (up in bull, down in bear), consisting of 5 sub-waves labeled 1-2-3-4-5.

•  Waves 1, 3, 5 are impulsive (strong directional moves).

•  Waves 2 and 4 are corrective (counter-trend pullbacks).

•  Corrective waves → Move against the main trend, usually in 3 sub-waves labeled A-B-C.

A complete cycle is thus 5 waves up/down (impulse) + 3 waves correction (A-B-C), forming larger patterns (fractal: smaller waves nest inside bigger ones).

Strict Rules (must be obeyed for a valid count):

1.  Wave 2 never retraces more than 100% of Wave 1 (cannot go below the start of Wave 1 in an uptrend).

2.  Wave 3 cannot be the shortest impulse wave among Waves 1, 3, and 5 (often the longest and strongest).

3.  Wave 4 does not enter the price territory of Wave 1 (no overlap, except in rare diagonal cases).

Common Guidelines (probable tendencies, not mandatory):

•  Wave 3 often extends (e.g., 161.8% of Wave 1 via Fibonacci).

•  Wave 2 and Wave 4 usually alternate in form (e.g., sharp vs. sideways).

•  Corrections often retrace 38.2%, 50%, or 61.8% of the prior impulse (ties perfectly with Fibonacci retracements from our earlier chat).


Typical Impulse Pattern Characteristics:

•  Wave 1: Initial move (often hard to spot).

•  Wave 2: Deep correction (but not below Wave 1 start).

•  Wave 3: Explosive, highest volume/momentum.

•  Wave 4: Shallow/sideways (alternates with Wave 2).

•  Wave 5: Final push, often weaker, may show divergence.

How to Use It in Trading (especially with prior topics):

•  Identify the larger trend → Count waves on higher timeframe.

•  In uptrend: Buy dips in Wave 2 or 4 (near Fib retracements 50%–61.8%), target Wave 3/5 extensions (127.2%–161.8%).

•  After Wave 5 completes → Expect A-B-C correction (sell/short or exit longs).

•  Combine with Fibonacci (retracements for entries, extensions for targets), candlestick patterns (e.g., bullish engulfing at Wave 2/4 lows), and volume for confirmation.

Example in Crypto (Bitcoin bull runs): Many analysts labeled BTC’s 2020–2021 surge as a 5-wave impulse (Wave 3 to ~$64k peak), followed by A-B-C correction in 2022 bear. Recent 2023–2025 rallies often show extended Wave 3s with Fib confluence.

Key Tip: Elliott Wave is subjective — multiple counts possible, so use strict rules first, seek confluence (Fib, support/resistance, candlesticks from our chats), and always apply risk management. It’s powerful for forecasting trend continuations/reversals but requires practice and never used alone!