Elliott Wave cycles

Starter draft. Rewrite in the group’s own voice.

The basic pattern

Ralph Elliott observed that trends tend to move in five waves in the direction of the larger trend (1 through 5), followed by a three-wave correction (A, B, C). Each wave breaks down into smaller waves of the same shape, so the pattern repeats from intraday charts to multi-year ones.

The three hard rules

1. Wave 2 never retraces more than 100% of wave 1.
2. Wave 3 is never the shortest of waves 1, 3 and 5.
3. Wave 4 doesn’t overlap wave 1’s price territory (except in diagonals).

If a count breaks a rule, the count is wrong. That gives you a clear invalidation level.

Common guidelines

• Wave 2 often retraces 50–61.8% of wave 1. Wave 4 is often shallower, around 38.2%.
• Wave 3 is frequently 1.618 times wave 1.
• Alternation: if wave 2 is sharp, wave 4 tends to be sideways, and the other way round.
• Corrections come as zigzags (5-3-5), flats (3-3-5) or triangles (3-3-3-3-3).

Using it well

Elliott Wave is best treated as a map of possibilities, not a forecast. Keep a main count and an alternate count, and state the price that would invalidate each one. In a weekly outlook, the invalidation level is often more useful than the target.