Here are some of the basics of Elliot Wave Theory. Elliot waves are what makes me money. A lot of people don't use them because they are typically hard to count, and people give up when things go the wrong way.
Every wave always has its own set of 5 subwaves. When you finish a full set of 5 big waves, it now becomes ONE large wave. Rules:
1) For EVERY wave, there is a CORRECTIVE wave. I will likely do another post on basic corrections. I cannot preach this enough. This makes me angry when people think things will go up forever without correcting. There is a limit to everything, and the ability to count waves correctly while using fibonacci levels can help you determine when those big corrections are coming. I used it to post shorts. And they've all been successful so far (even on Bitcoin). So know that when EBall Shorts, you better get out hahaha.
2) Wave 3 is NEVER the shortest If you count waves going up, and see that wave 3 is shortest out of all 5 waves, you're count it wrong.
3) A Corrective wave does NOT retraces back to the beginning of it's start! If this happens, you counted wrong. If you count ONE big wave, and it retraces below that point, then it is NOT a true Elliot wave. That is when there it typically something fundamentally wrong. If you're looking for the next big coin, look for one that has had an impulse wave up, and has NEVER retraced back below that starting point. That is an indication of potential for healthy growth. Let's say Bitcoin drops to $0. That is when Elliot wave would fail. We can all agree that the only way for Bitcoin to drop to zero would be a fundamental problem.
4) Corrective wave 4 CANNOT drop into the territory of wave 1 There are exceptions to this in ascending and descending triangles. It actually typically happens in corrective waves, but should not happen in impulse wave. This is how i find critical support levels. If it hits the support (peak of wave 1), then it should not go any lower, it should at least get immediate rejection to that area. Like I said, it can drop a little bit past sometimes (especially in triangular patterns), but 8 times out of 10, if it goes too far, your count is wrong. And that wave 4 is more than likely a wave 2 of a subdivided 5 wave structure in an extended 3rd wave (look at the wave all the way to the right to see what I'm talking about).
5) Correction waves NEVER happen in 5 waves. It is always At least an ABC or ABCDE. Never a 12345. I'll get into this later during the correction post. Just know that correction waves have their own personality. They are harder to predict and have MANY different forms. A, C and E waves go with the downtrend, B and D waves go against it. A and C waves CAN have 5 waves within them, but don't confuse it with it an ABCDE.
I think this is it for the basics. Elliot wave is my baby. And I'm still learning, because there is so much to know about it. But when you get it down, and have the eye for it, making money starts to get easy. This is how some analyst have predicted big "bubbles" and crashes because they counted Elliot Waves. And using Fib along with this, makes the whole process easier. It's kind of scary honestly. Because you can predict future events in terms of price level. Pricing in the market is a full reflection of market sentiment. This is a psychological tool used to detect market psychology. This is why i do VERY LITTLE fundamental analysis, because I see everything in the charts. The charts tell me everything. Elliot wave is not only a law of the markets, but is kind of a law of nature (at least Fibonacci is). Even scientists use it for things that I don't know. But when you get it down, you start to scare yourself. I've predicted wave 5s with big corrections while having no idea what fundamentals were going to cause a sell off.
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Fun Fact: I did not learn all of this by myself. I had a teacher. All of his videos are on youtube. His videos nearly taught me 80% of the things I know now. His name is Phil a Kone. Here is the link to his youtube channel. youtube.com/channel/UCeu9yMweVfTCftF9gvnuGeA
When I decided to get into day trading, It all went down hill. I lost nearly 30% of my portfolio in 4 weeks. I saw a post that said "90% of day traders lose 90% of their money in 90 days." I was RIGHT on track. I told myself that I was going to stop day trading and just invest. Because 90% of Investors outperform day traders.
But no. I'm way too competitive for that. I said fuck that. I've been competing all my life through school and football (which I'm still doing D1) and I found this passion of mine that I couldn't leave behind. After watching Phil A Kone's videos and STUDYING HARD and PRACTICING FOREVER I'm starting to get it down. I share his passion for this. I'm truly addicted. Sometimes I dream in charts. Is that healthy, hell nah hahaha. But sometimes that is what it takes to be a great trader. Full commitment. If you have the drive and the passion, then do it. If you don't, and all you want is money, then don't. I do it for the pure joy of cracking the code. This is just one big game to me. And I'm trying to become the best.
In order to get better you have to take steps back. That is LITERALLY Elliot Wave. And it pisses me off because I know that in life I'm always going to have times where I have to get knocked back before I go up hahahah.
After I did all of that, and continued to make mistakes, I doubled my portfolio. And SINCE Bitcoin has been CORRECTING 3 weeks ago I have nearly made 4-5 times my portfolio in the span of that time. Don't ever let someone tell you that you can't make money from long positions in a bear market. I'm doing this full time after I graduate. Granted my portfolio is small, I'm a college student. If you are a college student, invest. You can turn $500 into $10,000 in 6 months EASY in cryptocurrencies if you continue to practice, MANAGE YOUR RISK, and never give up. Pay off those student loans, buy a house, get yourself a car, but don't stop trading! Compound interest. Good luck to everyone, and I hope you all have the same aspirations that I do! Let's make this community strong. I'm trying to help Phil create an army of Elliot Wave counters LMAO. Peace, and Much love.
Correction on point #3!! Correction waves do not go back to the start of the previous impulse wave is what I mean! So wave 1's starting point cannot be breached by wave 2. Wave's 5's correction cannot go below wave 1.
I forgot to say. I've only been doing this for 2-3 months now. But i've spent at least 1000 hours of studying and practice. Yeah, that's at least 12 hours a day. I don't sleep much. I tore my ACL before the football season started and it gave me the opportunity to get into this. But all I can say is hard work will get you to where you want to be. And I'm not NEARLY where I want to be yet. I'm just now starting wave 3. ;D.
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Damn i messed up again! Wave 5's correction cannot go below the *START of wave 1!!
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Guys, please read rule #4! I've had a few people ask me about wave 4 retracing into the zone of wave 1! There are exceptions to the rule, and you have to be diligent on when those rules apply and when they don't. But they do occur. On impulse waves, wave 4 may overlap a bit with wick (on the most relevant time frame). Which means it can happen on minute scale time frames. It happens more often in crypto than it does in equity due to volatility alone. Price changes aren't as dramatic in equity, so usually the wave 4 retrace isn't that heavy and we don't see that happen as much.
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Please remember that this is a BASIC educational piece on Elliot waves. I will create more posts, but elliot waves analysis is NOT the most suitable for everyone. It is a mastery level technique and requires hours upon hours to fully understand all rules and guidelines to it. A lot of people try to analyze with elliot waves but fail to see little details that can make their count invalid. Trading ONLY with elliot waves is risky, that's why I use many other techniques in combination with elliot waves in order to create strong analysis. If you are strong in multiple techniques, then using them all will only make your trading stronger.
The good thing with elliot waves is that there is ALWAYS an answer. But the bad thing is that there are often TOO many answers. At certain points in time, elliot wave analysis can become ambiguous. Leaving too many options available, and declaring a no trade zone.
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Another thing to mention. Elliot wave analysis does not work very well in satoshi. Trading in satoshi is having a volatile coin as your denominator. Elliot wave analysis is only valid in cash markets. Bitcoin denominated coins are not considered cash markets. If you can find the USD denominated currency charts, then elliot waves can work. But even then, trading in satoshi throws it off a bit. The denominator must be constant. Because Bitcoin changes price, it will change the satoshi value of whatever coin you are trading which then alters the actual price movements of itself. Not all charts work with elliot wave. There are many markets that are fundamentally incompatible with elliot wave theory. Elliot wave theory works with specific kind of markets.
To be true Elliot Wave. Wave 3 must surpass 1.618 to even be valid.
Elijah_Trading
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@southnjes, don't know who told you that but that's incorrect
southnjes
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@Eball8, You should be able to find that at any Elliot wave instruction guide that wave 3 structure usually hits the 1.618 Fibonacci level of wave 1. From my understanding, and most, bar a very few traders that I know, use this to quantify the full impulse wave structure and anticipate its moves.
Of course you have different Fibonacci levels for each wave but wave 3 is the ONLY wave where it has a single percentage factor which it normally hits which is why many traders want this level to be obtained for validation of the wave 3. Maybe I should have clarified that "valid" was intended to mean "valid for the majority of traders". Honestly, I thought that was a given though.
"2.5 Relation Between Fibonacci and Elliott Wave Theory
Fibonacci Ratio is useful to measure the target of a wave’s move within an Elliott Wave structure. Different waves in an Elliott Wave structure relates to one another with Fibonacci Ratio. For example, in impulse wave:
• Wave 2 is typically 50%, 61.8%, 76.4%, or 85.4% of wave 1
• Wave 3 is typically 161.8% of wave 1
• Wave 4 is typically 14.6%, 23.6%, or 38.2% of wave 3
• Wave 5 is typically 61.8%, 100%, or 123.6% of wave 1
Traders can thus use the information above to determine the point of entry and profit target when entering into a trade."
Best regards.
Elijah_Trading
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@southnjes, It's a guideline. Not a requirement. Be careful with those. Wave 3 can in fact be shorter than wave 1, meaning that it won't extend to 1.618. It just can't be the shortest wave. When you start to develop into expanding and contracting wedges often times you find that extension of 1.618 to fail. But sure, i use 1.618 as a normal target, does not always mean it will reach it.
southnjes
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@Eball8, Yes it's a guideline but many do shoot for that 1.618. I normally shoot for under because as you said "often times you find that extension of 1.618 to fail". Manny times that 1.618 is too far of a reach which one can easily see from their TA imho.
Xanthus
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@southnjes, There's institutional traders that don't even follow the retail wave structure of elliot. There are tons of variations and there's no real right or wrong. Price moves in waves but I think it's a bit strange to think that that happens in a set pattern each and every time of 5 and 3 waves.
southnjes
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@Xanthus, There are many that just do not believe it EW at all. I think it has its place along with all the others.
RyanPal
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@southnjes, 1.618x, 2.618x, 4.23x wave 1 are wave 3 targets, like always (Except very rare extended first waves and well, sub-waves of ending diagonal)
Chris_Svorcik
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Thank you for the post! Great work on the visuals, I think it's much easier for traders to grasp. Especially when they see how the rules are incorrectly applied too. We actually did kind of the same with our Fibonacci and Wave guide because a lot of guidelines are based on Fibs. This EW reference guide provides an idealized drawing for each EW pattern, including a visualization of the most important internal wave size relationships. It also includes an overview of the Elliott Wave rules. The images highlight the most common wave retracement and extension targets in red, followed by the next most common targets in orange, followed by the least common targets in grey. Here is the guide: elitecurrensea.com/education/elliott-wave-patterns-fibonacci-relationships-core-reference-guide/ after analysing and trading Elliott Wave for more than 10 years, I place the most emphasis on Fibonacci, Fractals, moving averages, and the MACD or AO in understanding the waves best. That is why my own method heavily uses moving averages for trading decisions rather than only on EW. elitecurrensea.com/forex-cfd/swat/
lavinsamuel
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A well articulated information on elliot waves. :)