BillCharison

Reason Why You Draw Elliott Waves WRONG

BITSTAMP:BTCUSD   Bitcoin / U.S. Dollar
The Elliott wave principle is known to every floor trader. Now, in 2019, I started noticing appearance of huge amount of beginners using this model in their analytics confidently, but could make errors in forms. It leads to formation of wave moving graphic, which don’t correspond to The Elliott wave principle and is wide to be truth. As a result, people lose their money.

In this article I would like to describe all the nuances and try to do it as understandable as possible., highlighting the points which are often neglected.
According to The Elliott wave principle, each market decision is the source of significant information and it’s effect in equal measure. Each transaction is a part of the market structure serving as a cause and consequence of the behaviour of others, due to the delivery of the transaction data to investors. This interrelation is owing to social aspects of "human nature" and it generates some forms. Due to the fact of the repetition of figures, it has predictive meaning.

It seems that sometimes the market reflects to the external conditions and events, but at other times it stays completely independent of what most people consider causal conditions. The point is the market has it’s own law. His movement is not always conditioned and predictable, which many get used to in daily living. The market is also not a cyclical system, as some proclaim, despite the fact that it’s moving reflects a structured, rigorous sequence.
This sequence presented in waves, so those waves are models of the directional movement , specifically:
Wave is one of the model which naturally develops according to The Elliott wave principle

Five-wave model:
The development of price movement, ultimately, forms a special wave structure. Three of them, marked with the designations O-1, 2-3 and 4-5, make directional movement indeed. They are split by countertrend interruptions- the opposite direction waves, marked as 1-2, and 3-4.


These interruptions are undoubtedly an integral part of the general directional movement .
R.N. Elliott did not specifically emphasize that there is only one basic figure - the “five-wave” model, but this is definitely a fact. At any time, the market can be estimated as being somewhere on the base five-wave model of the highest wave level of movement. the five-wave model is the basic figure of the market movement; therefore, all models can be composed of it.

Wave mode:
There are two styles of wave development: motive and corrective.
Motive waves have a five-wave structure, while corrective waves have a three-wave structure or their varieties. The motive style is the basis of the five-wave structure in the figure above, and its unidirectional components, i.e. waves O-1, 2-3 and 4-5. Their structures are called “moving” because they put the market in considerable motion and are co-directional with the trend. The corrective style is the basis of all interruptions in the opposite direction, which include waves 1-2 and 3-4 in the picture above.
Their structure is called “corrective” because they can only perform a partial interruption or “correction” from the movement achieved by any previous driving wave. Overall, these two styles are fundamentally different in their role and in their structure, what will be described in detail in this article.

Twists and turns of the full cycle:
R.N. Elliott indicated In his 1938 book, “The Law of the Waves”, that the stock market is developing in accordance with a basic rhythm or model of five upward waves and three downward waves, forming a complete cycle of eight waves. A model of five upward waves followed by three downward waves is shown below:

In addition, one complete cycle, consisting of eight waves can be represented by two different phases: the impulsive phase, whose composite waves with a level less than indicated by numbers, and the correction phase, whose subwaves are indicated by letters. The order a, b, c corrects the order 1, 2, 3, 4, 5, as shown in the image above (just as waves 2 and 4 correct waves 1 and 3, respectively).

After the end of the wave cycle shown in the 2nd image, the second similar cycle of five upward waves begins, followed by three downward waves. Then the third stage of movement develops, also consisting of five upward waves. This third stage ends the five-wave motion with one wave level higher than the level of the waves of which it consists. The result is shown in the image below to the peak indicated by (5).


At the peak of wave (5), a downward movement of a correspondingly higher wave level begins consisting of three waves again. These three waves of the next wave level “correct” the movement of five upward waves of the same level. The result is another complete cycle, but at a higher wave level, as shown in the 3rd image. In the same picture, each unidirectional component of the motive wave of a full cycle and each full-cycle component (i.e., waves 1 + 2 or waves 3 + 4) of this cycle are a reduced version of the same cycle, i.e. waves of a finer wave level. {Waves (1), (3) and (5) - reduced copies of the wave ; waves 1, 3 and 5 - reduced copies of waves (1), (3) and (5); waves (1) + (2), (3) + (4) - reduced copies of waves + ; waves 1 + 2, 3 + 4 - reduced copies of waves (1) + (2), (3) + (4) *}

(Below I will denote the waves by abbreviated notation, namely (O-1) = (1), (1-2) = (2), (2-3) = 3, (3-4) = 4, (4 -5) = 5. (O-A) = (A), (AB) = (B), ( BC ) = (C).)

It is really important to understand the main point: the 3rd image not only illustrates the expanded version of the figure, made up of the figure in the 2nd image. Moreover, it shows the same figure from the 2nd image, but in more detail. In the 2 image, each subwave 1, 3 and 5 is a motive wave that can be divided into “fives”, and each subwave 2 and 4 is a corrective wave that can be divided into a, b waves, c. If we consider the waves (1) and (2) on the 3rd image elaborately, they form the same figure as the waves and . All these images demonstrate the phenomenon of an invariable form inside an always changing wave level. The composite structure of market prices is such that two waves of the same wave level are divided into eight waves of a smaller wave level, and these eight waves are divided in the same way into thirty-four waves of the next wave level. In this case, The Elliott wave principle reflects the fact that waves of any wave level, in any sequence, can always be divided again and again into waves of a lower level and at the same time they are also components of waves of a higher wave level. Consequently, we can use the 3rd image. to show two waves, eight waves or thirty-four waves, depending on the wave level to which we refer.
Fundamental concepts:


The phenomena of form, wave level and relative motion are even more detailed on the 4th image. This illustration reflects the basic law - on any market cycle, the waves are distributed as shown below.

Number of waves at each level:

  • Motive + Corrective = Cycle
  • The highest level 1 + 1 = 2
  • The level below 5 + 3 = 8
  • Next level down 21 + 13 = 34
  • Next level down 89 + 55 = 144

No figures on the 2nd image and 3m image., neither the figure on the 4m image means the end of their development. As before, the end of another eight-wave movement (five up and three down) completes the cycle, which automatically becomes two components of the wave of the next wave level. As long as wave development continues, the process of constructing higher wave levels continues. The reverse process of separation into smaller wave levels also continues unlimitedly. In this case, as far as we can judge, all waves are composed of wave components, and are such.

R.N. Elliott himself never made an assumption why the underlying market structure consists of five waves of growth and three waves of interruption. He simply noted that this is the fact. Should the foundational structure necessarily consist of five and three waves? Think and you will understand that this is a necessary minimum, providing translational motion simultaneously with elements of forward movement, and with elements of interruption, and, therefore, the most effective way of such movement. One wave does not contain an interruption. The minimum set for the interruption is three waves. Three waves in both directions will not provide translational motion. In order to move in one direction regardless of the duration of the interruption the movement in the main direction should contains at least five waves just to exceed the interruption from three waves and still contain these interruptive waves. Although to ensure this there could have been more waves than in our case but the most rational figure of guaranteed forward movement is 5-3 = 5-C, and nature usually follows the most rational path.

The Elliott wave principle would be easy to apply if the main issues described above constitute a complete description of market behaviour. However, the real world, fortunately or unfortunately, is not so simple. Next, we describe the market behaviour in real life. This is what Elliott intended to describe, and he succeeded.
Leave your like to speed up an update on this idea. There we will talk about one of the very titled traders who became the winner of the US Championship in trading in 1984 with a real cash account and set a record that has not been broken so far.
Nov 23
Comment: Here and throughout I’ll define the market behaviour in practice. That is what R.N. Elliott intended to characterize. And he excelled in it.

Detailed analysis

Wave level:
All waves could be classified n relative size and wave level. R.N. Elliott distinguishes 9 wave levels from the smallest bends on the 1-hour chart to the largest waves that he gets from the data available at that time. He chose the following names in order to categorize them:

  • Grand Supercycle
  • Supercycle
  • Cycle
  • Primary
  • Intermediate
  • Minor
  • Minute
  • Minuette
  • Subminuette


It is important that these names are related to uniquely identifiable wave levels. For example, when we refer to the rise of the cryptocurrency market, we talk about a Supercycle with the following splitting into waves:

2010-2014 - the first cycle level wave
2014-2015 - the second cycle level wave
2015-2017 - the third cycle level wave
2017-2019 - the fourth cycle level wave
2019-20 ?? - fifth cycle level wave

The Cycle level waves are divided into the Primary level waves. It is also subdivided into the Intermediate level waves, which in turn are subdivided into Minor level waves and lower level waves. Using this classification, the analyst can accurately determine the position of the wave in the overall market movement, by analogy with longitude and latitude to determine the geographical location. Say "Etherium/Dollar is at wave v of the Minute level, wave 1 of the Minor level, wave (3) of the Intermediate level, wave of the Primary level, wave I of the Cycle level, wave (V) Supercycle level, at the current Grand Supercycle wave level" means indicate a specific point on the trajectory of market history.

It is recommended to use some system for designating waves, for example, one that is shown below, in order to distinguish waves on the market trajectory:


The symbols in the table above are the closest to the Elliott symbols, but the list in the table below provides a more orderly use of symbols.


Tradingview.com, in turn, provides us with a more modern and richer set of symbols described in the following table.


In the Elliott terminology, the names of the wave levels are very arbitrary and don't carry much meaning for the levels themselves. “Cycle level” - does not mean that it is the base for counting, and “Intermediate level” can only signify that it is between the Primary and Minor wave levels. Special terminology is not important for determining relative wave levels, and the authors have no arguments for amending these terms, although we got used to the Elliott classification despite the order
Specific identification of the wave level in modern applications is sometimes one of the difficult aspects of The Elliott wave principle. It can be difficult to decide to which wave level the nascent structures belong especially at the beginning of a new wave. The main reason for this difficulty is that the wave level is not based on specific price values or time intervals. Waves depend on the form, which is a function of both price and time. The wave level of a figure is determined by its size and position in relation to composite, adjacent and surrounding waves.

This relativity is one aspect of The Elliott wave principle, which interprets waves in real time (i.e. when you are at the very right edge of the chart) an intellectual task. Fortunately, the exact wave level is usually not related to successful predicting, because the relative wave level works on the result mostly. The diversity of waveforms is another problematic side of The Elliott wave principle.
Nov 23
Comment: Impulse waves.

Motive waves.

Motive waves consist of the five waves with certain features and always develop in the same direction as the wave movement one wave level above. They are lineal and relatively easy to identify and explain.
In moving waves, wave 2 never pulls back more than 100% of the size of wave 1 and wave 4 never pulls back more than 100% of the size of wave 3. Wave 3, in addition, always moves beyond the end of wave 1. The purpose of the motive wave is to move forward and these rules for building waves guarantee that this would happen. Moreover, Elliott discovered that, in terms of value, wave 3 is often the longest and never the shortest among the three active sub-waves (1, 3 and 5) of the motive wave. As long as wave 3 retains a greater (in percentage terms) length than wave 1 or 5, this rule is fulfilled (we mean the semilogarithmic scale). It is also almost always works in a linear price scale. There are two types of motive waves: impulses and diagonal triangles.

Impulse

The most common motive wave is impulse. In an impulse, wave 4 does not enter to the space (i.e., does not overlap) of wave 1. This rule is fulfilled for all non-marginal (“without borrowed funds, means, without margin”) markets. Futures markets, with their high margins, can lead to short-term price surges that would not have happened in markets without borrowed funds. In this case, the intersection is usually limited to daily or intraday price changes and even then it is extremely rare. In addition to this, the active sub-waves (waves 1, 3 and 5 less) of the impulse are motive, and sub-wave 3 can only be an impulse. On pic. 1, pic. 3 and Pic 4, impulses are shown at wave positions 1, 3, 5, A and C. Also, in all the images above, I used only a schematic representation of the waves without taking into account the relative length.

As it was thoroughly described in the previous three paragraphs, there are just a few simple rules for interpreting wave impulses properly. All waves strictly follow the rule that applies to them because the rule is the rule. Typical, but not obligatory characteristics of the waves will be called guidelines. Guidelines for constructing impulses will be discussed below, including wave extension, wave truncation, alternation, equality, channels formation, wave identity, and correlation of the proportions. No rule should ever be neglected. In many years of practice with countless models, the authors run down only one example which is older than the Subminuette, where all other rules and guidelines were applied before assuming that the rule was broken. Analysts who easily break any of the rules described in this section practice some form of analysis, but different from the one that obeys The Elliott wave principle. These rules are of great practical use in the correct calculation of waves. That is the point we will consider later in the discussion of wave extensions.

Extension

Many wave impulses contain what Elliott called wave extension. Wave extensions are stretched impulses with an expanded wave structure. A huge number of impulses do contain an extension in one and only one of its three active waves. It is preferable to number a sequence of nine waves of a similar size than the usual "five" in cases where the substructures of the extended wave have of almost the same amplitude and duration as the other four waves of a large impulse. In a nine-wave sequence, it is sometimes difficult to say which wave is extended. Anyway this is unimportant, because according to the Elliott system the calculus of nine waves and the calculus of five waves have the same technical significance. Scheme on Pic. 5 illustrates wave extensions and clarify this issue.

Nov 23
Comment: The fact that extensions usually develop in only one active subwave provides a useful clue to the projected lengths of the proceeding waves. For example, if the first and third waves are approximately equal in length, the fifth wave is likely to be an extended wave. (In waves below the Primary wave level, the development of the fifth wave extension will be confirmed by a record high volume.) And vice versa, if the third wave is extended, the fifth wave is likely to be of a simple configuration and similar to wave 1.

In the market, in most cases, the extended wave is wave 3. This fact is especially important in interpreting waves in real time, when it is considered in conjunction with the two rules of impulse waves: wave 3 is never the shortest and wave 4 cannot overlap wave 1. To clarify this, let's look at two situations involving incorrect mid-wave marking, as shown in Pic. 6 and Pic. 7.


In the pic. 6 wave 4 overlaps the top of wave 1. In the Pic. 7 wave 3 is shorter than waves 1 and 5. In accordance with the rules, no markings are permissible. The marking should be brought into line with the rules since it has been proven that the marking of the alleged wave 3 is unacceptable. The last example should almost always be marked as shown in Pic. 8 indeed, implying the beginning of the development of an extended wave 3. Do not be afraid to get accustomed to mark the initial stages of wave 3 as wave extension. Probably, Pic. 8 is the single most useful guideline in this article for marking impulse waves in real time.

Extension can also happen inside another wave elongation. In the market, the third subwave of an extended third wave a level above is usually also an extension, drawing the outline shown in Pic. 9. Pic. 10 illustrates extension of the fifth wave in an already extended fifth wave a level higher. Extended fifth waves are quite rare.

Nov 23
Comment: Truncation

Elliott used the word "failure" to describe a situation in which the fifth wave does not exceed the top of the third wave. We prefer a less ambiguous term - "truncation" or "truncated fifth". Make sure that this is really wave truncation by checking that the alleged fifth wave contains the necessary five sub-waves, as shown in Pic. 11 and Pic. 12. Truncation usually occurs after an extremely strong third wave.



Diagonal Triangles

A diagonal triangle is a motive model, although not yet an impulse, because it has one or two corrective features. Diagonal triangles replace impulses in certain places of the wave structure. As in the impulse, none of the countervailing subwave (a composite wave with a level below) pulls back more than the size of the previous active subwave, and the third subwave is never the shortest. Nevertheless, diagonal triangles are the only five-wave structures developing in the direction of the main movement, in the structure of which wave 4 almost always enters the price space (overlaps) wave 1. In rare cases, the diagonal triangle can end with a truncation, although in our experience on the cryptocurrency market, the size of such truncations is the smallest.

Ending Diagonal

An ending triangle is a special type of wave that develops mainly in place of the fifth wave when the previous movement (wave 3) went “too far and too fast”, as Elliott presented it. A very few percentage of ending triangles appears at the place of wave C in structures A-B-C. In double and triple threes, they appear only as the last wave of C. In all cases, they are found in the final components of the model one wave level above, showing the depletion of the force of motion in this larger impulse wave level.

Ending triangles have the form of a wedge between two converging lines and each of their composite subwaves, including waves 1, 3 and 5, is divided into a “three”, which in other cases is a feature of the corrective wave. The ending triangle is illustrated on Pic. 13 and Pic. 14 and is shown in its typical position in the larger impulse wave level.



Although it is not shown in pic.13 and Pic. 14, the fifth wave of diagonal triangles often ends with a “throw-over”, i.e. a short puncture of the resistance trendline connecting the ends of subwaves 1 and 3. While the volume of transactions tends to decrease during the development of a diagonal triangle of a small wave level, this model always ends with a relatively high surge in volume during a price throw-over. In rare cases, the fifth subwave does not reach its resistance trendline.
The ascending diagonal triangle is a sign of the bearish moods and is usually followed by a sharp fall in prices, at least to the level where this triangle started to develop. The descending diagonal triangle is, for the same reason, a bullish sigh, usually giving rise to a upward throw-over in prices.

Extension of the fifth wave, a truncated fifth wave, an ending diagonal triangle - all of these models comprise the same fact: the upcoming impressive change in direction. At some turning points, two such phenomena occurred together at different wave levels, multiplying the power of the next movement in the opposite direction.
Nov 23
Comment: Leading Diagonal

When diagonal triangles form in place of wave 5 or C, they take on a 3-3-3-3-3-3 structure (all subwaves are “threes,” that is, they consist of three waves), as Elliott described. However, it has recently become clear that a variation of this model sometimes appears in place of wave 1 of the pulse and wave A of the zigzag. The sign of overlapping waves 1 and 4 and the convergence of the resistance trendlines in the shape of a wedge remain the same as in the final triangle. However, the division into waves is different, drawing the model 5-3-5-3-5. The structure of such a model, as shown in Pic. 15, corresponds to The Elliott wave principle in the fact that five-wave subwaves in the direction of motion at a wave level above indicate a “continuation” of motion, in contrast to the meaning of the “end” of motion carried by three-wave subwaves of an endingtriangle. The analyst should be aware of this model so as not to confuse it with the much more widespread development of waves - a sequence of first and second waves (different wave levels). The main key to recognizing this model is a certain slowdown in price changes in the fifth sub-plane compared to the third. In contrast to this, in the developing first and second waves, short-term speed (price changes) usually increases, and breadth often increases.


In the Pic. 16 it is shows another example of the leading triangle. This model was not originally described by R.N. Elliott, but appeared a huge number of times over a sufficiently long period of time so that I became convinced of its validity.

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Totally agree with this. I'm a long term investor, using long term log chart which looks pretty much the same as this. Cannot see it going under current value and it slowly moving up to 9800 around 1st March then moving sharply up from there.
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Whatever long term does, scalping within this zone on the short is pure Gold:

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nice summary, thanks for sharing this!
Here's my update on BTCUSD daily with plan for bulls/bears SL/TP. All previous targets got hit, FYI.
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2mths from december to july? is that a typo?
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