This post is intended for educational purposes only.
SCUSD is one of the better Elliot Wave examples I've seen and in my opinion a good use case for the theory. The aim of the post is to share some basic notable points to look for when trying to establish likely scenarios or just review what has happened in a previous impulse and subsequent correction(s).
Firstly, EW does not predict the future. Any analyst claiming a 100% accuracy is more likely to have access to a time machine. Patterns take different routes, waves extend and fail, and corrections can transform into a complex uncountable mess. However, the theory has its benefits and can be useful to determine where an asset is in the trend and the likely price & time targets for a future move, whether up or down.
Looking back on the case of SCUSD, a list of the notable points mentioned earlier:
1. 5 waves from low to high, clearly visible and difficult to misinterpret
a. 3 in the direction of the trend (impulses) and 2 against the established trend (corrections)
2. Alternation between the two corrections (wave 2 & 4)
a. Wave 2 was deep at 61% or the initial impulse
b. Wave 4 was shallow at 38% at took less time to complete than wave 2
c. Second waves will often have deeper corrections because it's early in the trend. It's simply harder to identify whether the asset will trend or not
3. Wave 3 is 161% of wave 1, a typical extension found in a third wave
a. Third waves are typically the longest and will have a much higher participation rate than any of the other waves
b. Usually, there's a lot of good news around an asset in third waves, and trend chasers are good at identifying these moves
c. As mentioned the participation rate is high and this is clearly visible in the volume exchanged
4. Wave 5 is 61% of wave 1 & 3 combined. There are a number of ways to anticipate the length of a fifth wave but the length can vary based on the asset class
a. Fifth waves typically have less participation. Traders tend to take profit in the third when volumes are high and the asset is loved
b. Fifth wave participants tend to be retail traders that are late to the party and expect the asset to continue in one direction "up only"
c. Notice the difference in Relative Strength (RSI) between the peaks of the third & the fifth. It's rare to see more strength in a fifth wave because of the aforementioned
d. With big players out of the market the strength and volumes exchanged during a fifth rarely meet that of the third
5. The wave 2 & wave 4 trendline. Once broken, the new trend is confirmed
a. Note, this is not something one wants to wait for confirmation on because price will most likely have already retraced 50+%
6. Bear! The first wave (wave 1) of a higher degree is now complete and so commences wave 2 of the higher degree
a. This is not something one would enjoy sitting through. As mentioned in the wave 2 of a lower degree, second waves tend to be deep and take a lot of time
b. You can expect a 61% haircut and in the case of SC, that's exactly what happened.
c. A wick below and close above on a high timeframe is perceived bullish. This can be expected and a point where traders will be hoping to get some lucky bids filled.
d. Expect bad news during this period. The trend will only change once the bad news has no affect on the price, usually once everyone has been flushed out.
7. Correlation in time between the initial impulse and the subsequent correction should be noted. In the case of SC, multiple conditions have been met.
a. It has retraced 61% of the initial impulse
b. There is a one-one (+/-) correlation in time of the impulse and correction
c. Time is too often overlooked. Time and price are the two data points you have by default on a chart. You're missing out if you're using one and not the other
d. Wave 2 typically takes a lot of time to complete but provided it has completed at least 38% in time of the initial impulse, the condition of time is met
e. Aiming for 61-100% of the initial impulse, and considering price action during that period is a decent approach
8. Resumption of higher degree trend after conditions are met.
a. After a first and second wave is complete, the expectation is a third wave.
b. A good target for a third wave in the case of SC would be 161% of the first impulse measured from the end of the second.
9. Can you be sure that even if the prior wave 1 high is broken that SC for example is going to complete five waves?
a. No, just because an asset is moving upwards does not mean it's a 5 wave (higher degree) impulse. It is also possible that the entire move is a correction (e.g. 5-3-5)
b In this case, a likely take profit target could be a one-one extension of the first wave which explains why you will often see selling at price points like the one-one ext.
10. If you made it this far then well done. Hopefully you'll take something valuable away from reading this post or maybe this isn't new information to you and I missed something / mentioned something that is not correct. Let me know in the comments.
Good luck out there!
SCUSD is one of the better Elliot Wave examples I've seen and in my opinion a good use case for the theory. The aim of the post is to share some basic notable points to look for when trying to establish likely scenarios or just review what has happened in a previous impulse and subsequent correction(s).
Firstly, EW does not predict the future. Any analyst claiming a 100% accuracy is more likely to have access to a time machine. Patterns take different routes, waves extend and fail, and corrections can transform into a complex uncountable mess. However, the theory has its benefits and can be useful to determine where an asset is in the trend and the likely price & time targets for a future move, whether up or down.
Looking back on the case of SCUSD, a list of the notable points mentioned earlier:
1. 5 waves from low to high, clearly visible and difficult to misinterpret
a. 3 in the direction of the trend (impulses) and 2 against the established trend (corrections)
2. Alternation between the two corrections (wave 2 & 4)
a. Wave 2 was deep at 61% or the initial impulse
b. Wave 4 was shallow at 38% at took less time to complete than wave 2
c. Second waves will often have deeper corrections because it's early in the trend. It's simply harder to identify whether the asset will trend or not
3. Wave 3 is 161% of wave 1, a typical extension found in a third wave
a. Third waves are typically the longest and will have a much higher participation rate than any of the other waves
b. Usually, there's a lot of good news around an asset in third waves, and trend chasers are good at identifying these moves
c. As mentioned the participation rate is high and this is clearly visible in the volume exchanged
4. Wave 5 is 61% of wave 1 & 3 combined. There are a number of ways to anticipate the length of a fifth wave but the length can vary based on the asset class
a. Fifth waves typically have less participation. Traders tend to take profit in the third when volumes are high and the asset is loved
b. Fifth wave participants tend to be retail traders that are late to the party and expect the asset to continue in one direction "up only"
c. Notice the difference in Relative Strength (RSI) between the peaks of the third & the fifth. It's rare to see more strength in a fifth wave because of the aforementioned
d. With big players out of the market the strength and volumes exchanged during a fifth rarely meet that of the third
5. The wave 2 & wave 4 trendline. Once broken, the new trend is confirmed
a. Note, this is not something one wants to wait for confirmation on because price will most likely have already retraced 50+%
6. Bear! The first wave (wave 1) of a higher degree is now complete and so commences wave 2 of the higher degree
a. This is not something one would enjoy sitting through. As mentioned in the wave 2 of a lower degree, second waves tend to be deep and take a lot of time
b. You can expect a 61% haircut and in the case of SC, that's exactly what happened.
c. A wick below and close above on a high timeframe is perceived bullish. This can be expected and a point where traders will be hoping to get some lucky bids filled.
d. Expect bad news during this period. The trend will only change once the bad news has no affect on the price, usually once everyone has been flushed out.
7. Correlation in time between the initial impulse and the subsequent correction should be noted. In the case of SC, multiple conditions have been met.
a. It has retraced 61% of the initial impulse
b. There is a one-one (+/-) correlation in time of the impulse and correction
c. Time is too often overlooked. Time and price are the two data points you have by default on a chart. You're missing out if you're using one and not the other
d. Wave 2 typically takes a lot of time to complete but provided it has completed at least 38% in time of the initial impulse, the condition of time is met
e. Aiming for 61-100% of the initial impulse, and considering price action during that period is a decent approach
8. Resumption of higher degree trend after conditions are met.
a. After a first and second wave is complete, the expectation is a third wave.
b. A good target for a third wave in the case of SC would be 161% of the first impulse measured from the end of the second.
9. Can you be sure that even if the prior wave 1 high is broken that SC for example is going to complete five waves?
a. No, just because an asset is moving upwards does not mean it's a 5 wave (higher degree) impulse. It is also possible that the entire move is a correction (e.g. 5-3-5)
b In this case, a likely take profit target could be a one-one extension of the first wave which explains why you will often see selling at price points like the one-one ext.
10. If you made it this far then well done. Hopefully you'll take something valuable away from reading this post or maybe this isn't new information to you and I missed something / mentioned something that is not correct. Let me know in the comments.
Good luck out there!
