Elliott Wave X2

Elliott’s wave theory is all about timing:  timing of market cycles. Elliott said that far from being random, the trends in financial markets are driven by a predictable rhythm of human behavior.  He called these waves, hence the name Elliott wave theory.

Elliott’s main idea was that during trending phases the crowd psychology is shifting back and forth between optimism and pessimism and that a trend will ultimately push in one dominant direction.

An Elliott wave is defined as the movement from a price peak to a price trough or a trough to a peak. A cycle comprises two waves: an impulse wave and a corrective wave.

In a bullish trend, the impulse direction is upwards, and the corrective direction is downwards. In a bearish trend it’s the other way around. A bullish cycle is shown in Figure 1 and a bearish cycle in Figure 2.

Simple Explanation of the Elliott Cycle

Elliott rightly identified that a trend rarely moves in a straight line but more often in steps: 3 steps forwards to 2 steps back. This is the main cycle.

In any Elliott cycle, there’s always an impulsive or motive wave followed by a corrective wave in the opposite direction. The corrective wave is always smaller than the impulsive meaning the price pushes toward the dominant direction of the trend.

A cycle can be broken down further into a  5-wave and  3-wave pattern. Bullish impulses have 5 waves: 3 waves up and 2 waves down. Bullish corrections have 3 waves – 2 down and 1 up.

So an impulse is made up of five separate sub waves from peak to trough, known as waves 1-5. And the corrective is made up of 3 sub waves, known as A-C.

Figure 1 for instance shows a complete bullish wave cycle. This shows the main impulse wave of 5 distinct sub waves. Waves 1, 3 and 5 are bullish impulse waves whereas waves 2 and 5 are the corrective waves within the main impulse.

In the main corrective wave, wave A and C are impulse waves (in the reverse direction), and wave B is a corrective wave.