Elliot Waves Complete Guide | Chapter 4.3 - "Market Psychology"

Hello Traders. Welcome to Chapter 4.3, where we will be learning about the 'Market Psychology' aspect of Elliott Waves . This is one of the most important and interesting proponents of the Elliott Wave theory as it constitutes all the psychological aspects within the whole market. If you have a clear understanding of market psychology within each level of wave structure or correction, you can get a good gist of what to predict what will happen even in the most basics of the five wave and simple abc correction.

📚Chapter 4 Glossary:

4.1 Alternation
4.2 Channeling
📖 4.3 Psychology
4.4 Fib-Ratio
4.5 Motive Wave Multiples
4.6 Corrective Wave Multiples

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Market Psychology of the complete five wave and abc structure within Elliott Waves

The beauty of EW is that its price actions are based on the collective reflection of the beliefs of all market participants - which is why market psychology is included within the theory. They represent mass psychology and the underlining dynamics from pessimism to optimism, back and forth .

Waves 1-5 Market Psychology

- Wave 1 is sometimes difficult to identify since it's the beginning of a trend, as the previous trend may be still intact. It also does not have clear price action, looks choppy and the waves are overlapping, forming wedges /diagonals.

- Wave 2 retraces a lot within the price action made from wave 1. Most traders still speculate on the previous trend to continue and do not notice a possible new trend forming.

- Wave 3 is almost always the biggest move. Most new EW traders can at least identify this. It represents the finished trend change, as wave 2 made a higher low followed by a higher high in wave 3. Also it is frequently extended, moving with strong momentum without any major corrections.

- Wave 4 can generally be predicted easily, as they tend to "alternate" (ch. 4.1) to wave 2 and take more time to finish. It is usually a complex movement, tricking traders into false signals.

- Wave 5 represents the final push in the direction of the PRIMARY trend. Usually wave 5 comes with lower volume and often shows a clear divergence in the indicators like the RSI ( bearish divergences).

ABC Correction Market Psychology

- Wave A can unfold in either a three or five wave structure depending on the situation. It represents the exhaustion created from the previous 5 wave, and is regularly not clearly visible as a lot of traders just think it is a normal pullback of the dominant trend.

- Wave B is can take many shapes and are known for being a "bull-trap“. Many will long the top of the B wave. The B wave can either retrace much lower than wave A or shoot up fast, sometimes even above the last high, catching traders on the wrong side as a fake breakout occurs. Most will have subwaves and in textbook technical analysis , a right shoulder in a Head-Shoulder formation.

- Wave C is impulsive and has five waves against the dominant trend. It usually has the length of wave A, but an extension to the 1.618 fib or even greater is possible, making them fast and devastating moves as they are punishing impulse waves.

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Elliot Waves Complete Guide | Chapter 1 - "The Overall Cycle"

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Elliot Waves Complete Guide | Chapter 2.1 - "Motive Waves"

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Elliot Waves Complete Guide | Chapter 2.2 - "Ending Diagonal"

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Elliot Waves Complete Guide | Chapter 2.3 - "Extensions"

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Elliot Waves Complete Guide | Chapter 3.1 - "Corrective Waves"

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Elliot Waves Complete Guide | Chapter 3.2 - "Flat-Expanded Flat"

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Elliot Waves Complete Guide | Chapter 3.3 - "Running, Contract"

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Elliot Waves Complete Guide | Chapter 3.4 - "Barrier/Expanded"

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Elliot Waves Complete Guide | Chapter 3.5 - "Double Three"

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Elliot Waves Complete Guide | Chapter 3.6 - "Triple Three"

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Elliot Waves Complete Guide | Chapter 4.1 - "Alternation"

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Elliot Waves Complete Guide | Chapter 4.2 - "Channeling"