# Elliott Wave Theory Basics Explained

Corrective waves move against the larger degree wave.

Wave 3 can never be the shortest of the three impulse waves.

Wave 1 of 1 would indicate that Wave 1 is part of a larger degree Wave 1. Apply the rules for the first count attempt and then the guidelines on the second.

## What is an 'Impulse Wave Pattern'

However, the stock will not make it to its previous lows before the stock is considered a bargain again. Wave 3 This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find out about the stock and want to buy it.

This wave usually exceeds the high created at the end of wave 1. Wave 4 Traders take profits because the stock is considered expensive again. You usually start seeing the CEO of the company on the front page of major magazines as the Person of the Year. Traders and investors start coming up with ridiculous reasons to buy the stock and try to choke you when you disagree with them. This is when the stock becomes the most overpriced.

Contrarians start shorting the stock which starts the ABC pattern. According to Elliott, it is usually the fifth wave which is extended. As time went by, this old school style of wave labeling has changed because more and more people started labeling the third wave as the extended one. The complete cycle is composed by those 2 parts and each cycle is part of an ever expanding matrix of interlinking cycles of various degrees of trend. In the basic Elliott wave formation, impulsive waves are labelled with the numbers 1,2,3,4,5, and corrective waves are labelled with the letters a,b,c.

As we can see in the chart above, impulsive waves will gain a lot of ground whereas in corrective waves, prices tend to struggle to get anywhere. Corrective waves are more of a sideways consolidation or range bound move that occurs when the market wants to hold on the ground that has been gained. It is important to remember that these charts are showing 5 waves up and 3 waves down as in a positive market, but impulsive waves also occur when markets are declining.

An impulsive move in a declining market will take the form of 5 waves down and 3 waves up. Impulse Waves Impulse waves are powerful moves composed of 5 sub waves that drive the market in the direction of the larger trend.

Within the larger impulse wave, the 5 waves subdivide into 5,3,5,3,5 formations and are labelled 1,2,3,4,5. Waves 1,3 and 5 are the impulse waves and are powerful, driving moves which are interrupted by the waves 2 and 4 corrective and consolidating phases, creating the wave like structure.

The smart money enters the market - The trend has changed but the market remains uncertain. Retraces some of the first wave back testing the previous extreme - the initial burst has petered out but the market does not seem to to have enough energy to resume the previous trend. Mass participation causes prices to explode in the direction of the new trend as the market accepts that the trend has reversed.

Quite often a shallow retrace of the Third wave as the market consolidates its gain and investors start taking profits. Distribution phase - Profit taking increases as the last man standing is forced into accepting that the trend has changed and is forced to liquidate his positions - Capitulation! An impulse wave itself always sub divides into 5 waves to a lesser degree, so the important factor for an Elliott Wave analyst in recognising that the trend has reversed is to be able to count 5 waves in the internal sub divisions of the move.

Wave construction is always the most important factor in wave recognition so let's look at the subdivisions within an impulse wave. Wave 1 Impulse First waves subdivide into 5 smaller waves and can be either slow but steady, grinding away and relentlessly moving against the trader convinced the previous trend is still underway, or they can be sharp and decisive blowing those traders out of the water. Wave 2 Corrective Second waves subdivide into 3 smaller waves and are often sharp and deep, retracing much of the wave 1.

Many traders are still convinced that the previous trend is still in effect. Generally speaking, second waves will be very deep and are most likely to retrace much of the first wave if that was a slow grinding move.

Very sharp and powerful first waves can lead to a very shallow wave 2.

## Learn Elliott Wave Theory Basics

Impulse wave pattern is used in technical analysis called Elliott Wave Theory that confirms the direction of market trends through short-term patterns.

Elliott Wave is fractal. This means that wave structure for the GrandSuper Cycle is the same as for the minuette. No matter how big or small the wave degree, impulse waves take on a 5-wave sequence and corrective waves take on a 3-wave sequence. Elliott Wave Theory is named after Ralph Nelson Elliott (28 July – 15 January ). 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.