In technical analysis, the Elliott Wave Theory stands in the front. With it, you can analyze long-term patterns and trade “in waves”. This theory applies to stocks trading well, as it is based on human psychology and sentiments. Let’s learn about the Elliott theory in the series of articles and start today with its basic principles.“Every action has an equal and opposite reaction”It is a famous law in physics on which the Elliott Wave theory is based, with some minor changes. In Elliott Waves, the complete formation of a wave includes:
The main trend of the price direction (an impulse wave)A corrective wave that is opposite or deviating from the main trend (i.e. a corrective wave). The degree of deviation varies depending on the wave.
Motive waves typesThe motive wave is the wave that represents and determines the main direction of the price. It consists of 5 waves internally:
Three waves move in the same direction as the main wave, i.e., in the direction of the trend. They go under the name (1-3-5).Two corrective waves move in the opposite direction to the motive wave, and they are named (2-4), as shown.
The main (motive) wave forms under a few general conditions:
The corrective wave 2 cannot exceed 99% of the motive wave 1.The corrective wave 4 cannot exceed 99% of the motive wave 3.The motive wave 3 is the strongest and longest of the motive waves.The corrective wave 4 cannot overlap with wave 1 (although there are exceptions).
The motive wave always follows a clear direction, either upward or downward. It has several forms of wave behavior and types. There are two types of motive waves:
Impulse wave.Diagonal wave. It is divided into a leading diagonal and an ending diagonal. We will discuss this type of wave in the upcoming article.
The Impulse Wave is the most famous and common type of motive wave. It consists of 5 waves (1, 3, 5) as impulse waves and (2, 4) as corrective waves.The Impulse Wave has its own formation rules too:
Corrective wave 2 cannot be longer than motive wave 1 (i.e., it cannot exceed 99% of its length).Corrective wave 4 cannot overlap with motive wave 1 (although some analysts found exceptions to this rule in highly liquid markets).Motive wave 3 is always the strongest and longest of all the waves, whether they are impulse or corrective waves.The alternation principle: It describes the exchange of specific patterns between waves 2 and 4. We will explain it later.The extension principle.The truncation principle.The parallel channel principle: If we draw a line between waves 3 and 5, and another line between waves 2 and 4, we will find them parallel, creating a parallel price channel.The proportionality principle.
In the next articles, we will dive into truncation, extended patterns, diagonal waves, and many more. Follow us on social media (Telegram, Instagram, Facebook) to get the Headway updates instantly.
