Wave Patterns with Motive Wave Rules and Guidelines
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Swings are called waves when the swing legs are labelled by numbers or letters. Waves are the constituting part of the market structure and analyzing waves helps to know the next swing/wave. More than 3 waves together form a pattern. The market is repetitive in nature and by now we know it moves in swings/waves, fractals are swings of different degrees, and these waves form patterns and these patterns keep repeating in different degrees.
As shown in the picture below the red labelled waves 12345 are of the biggest degree in the chart and show an impulsive move having a sequence of higher highs and higher lows (uptrend) hence forming an impulsive pattern. The green ones are smaller degree waves labelled ABC and are corrective patterns of the red impulse pattern. Another smaller degree impulse is the blue 12345 patterns.
So, the repetitive pattern of the market chart is impulse correction impulse. Waves 1, A, 3 and 5 are impulse waves and waves 2, B and 4 are corrective waves.
Combination of impulsive and corrective patterns either forms a bigger degree of correction or trend. The next lesson tells you how to identify trends and their importance for a trader.
Elliott Wave Theory is named after Ralph Nelson Elliott (28 July 1871 – 15 January 1948). He was an American accountant and author. Inspired by the Dow Theory and by observations found throughout nature, Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves.
Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns. Elliott based part of his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Elliott first published his theory of market patterns in the book titled The Wave Principle in 1938.
In Figure here, waves 1, 3 and 5 are motive waves and they are subdivided into 5 smaller degree impulses labelled as ((i)), ((ii)), ((iii)), ((iv)), and ((v)).
Wave 2 and 4 are corrective waves and they are subdivided into 3 smaller degree waves labelled as ((a)), ((b)), and ((c)). The 5 waves move in waves 1, 2, 3, 4, and 5 making up a larger degree motive wave (1)
An impulse wave subdivides into 5 waves. In Figure 2, the impulse move is subdivided into 1, 2, 3, 4, and 5 in minor degrees.
Wave 1 always subdivides into an impulse or (rarely) a diagonal.
Wave 3 always subdivides into an impulse. (Wave 1, 3, and 5 subdivisions are impulse. The subdivision in this case is ((i)), ((ii)), ((iii)), ((iv)), and ((v)) in minute degree)
Wave 5 always subdivides into an impulse or a diagonal.
Wave 2 always subdivides into a zigzag, flat or combination
Wave 2 never moves beyond the beginning of Wave 1.
Wave 3 can not be the shortest wave of the three impulse waves, namely wave 1, 3, and 5
Never are waves 1, 3, and 5 all extended.
Wave 4 does not overlap with the price territory of Wave 1
Wave 3 always moves beyond the end of Wave 1
Wave 5 needs to end with momentum divergence
Wave 4 will almost always be a different corrective pattern than wave 2
Wave 2 is usually a zigzag or zigzag combination
Wave 4 is usually a flat, triangle or flat combination.
Sometimes wave 5 does not move beyond the end of wave 3 (in which case it is called a truncation)
Wave 5 often ends when meeting or slightly exceeding a line drawn from the end of wave that is parallel to the line connecting the ends of waves 2 and 4, on either arithmetic or semi-log scale.
The centre of wave 3 almost always has the steepest slope of any equal period within the parent impulse except that sometimes an early portion of wave 1 will be steeper.
Wave 1, 3 or 5 is usually extended (extensions appear “stretched” because its corrective waves are small compared to its impulse waves. It is substantially longer, and contains larger sub-divisions, than the non-extended waves).
Often, the extended sub-wave is the same number (1, 3, 5) as the parent wave
Rarely do two sub-waves extend, although it's typical for waves 3 and 5 both to extend when they are of Cycle or Supercycle degree and within a fifth wave of one degree higher.
Wave 1 is the least commonly extended wave.
When wave 3 is extended, waves 1 and 5 tend to have gains related by equality or the Fibonacci ratio.
When wave 5 is extended, it is often in Fibonacci proportion to the net travel of waves 3 through 5.
Wave 4 typically ends when it is within the price range of sub wave four of 3
Wave 4 often subdivides the entire impulse into Fibonacci proportion in time and/or price.
A diagonal always subdivides into five waves.
An Ending Diagonal always appears as wave 5 of an impulse or wave C of zigzag or flat.
A leading diagonal always appears as wave 1 of an impulse or wave A of zigzag.
Waves 1, 2, 3, 4 and 5 of an ending diagonal, and waves 2 and 4 of a Leading Diagonal, always subdivide into zigzags.
Wave 2 never goes beyond the start of Wave 1.
Wave 3 always goes beyond the end of wave 1.
Wave 4 never moves beyond the end of wave 2.
Each of the waves: 1, 2, 3, 4, and 5 are constituted with 3 sub-waves.
Wave 4 always ends within the price territory of wave 1.
Going forward time, a line connecting the ends of waves 2 and 4 converges towards 9in the contracting variety) or diverges from (in the expanding variety) a line connecting the ends of waves 1 and 3.
In a leading diagonal, wave 5 always ends beyond the end of wave 3.
In the expanding variety, wave 3 is always longer than wave 1, wave 4 is always longer than wave 2, and wave 5 is always longer than wave 3.
In the expanding variety, wave 5 always ends beyond the end of wave 3.
1. Waves 2 and 4 each usually retrace .66 to .81 of the preceding wave.
Waves 1, 3 and 5 of a leading diagonal usually subdivide into zigzags but sometimes appear to be impulses.
2. Within an impulse, if wave 1 is a diagonal, wave 3 is likely to be extended.
3. Within an impulse, wave 5 is unlikely to be diagonal if wave 3 is not extended.
4. In the contracting variety, wave 5 usually ends beyond the end of wave 3. (Failure to do so is called a truncation)
5. In the contracting variety, wave 5 usually ends at or slightly beyond a line that connects the ends of waves 1 and 3. (Ending beyond that line is called a throw-over).
6. In the expanding variety, wave 5 usually ends slightly before reaching a line that connects the ends of waves 1 and 3.
