Understandable for beginners: the basic of "Elliott Wave"

The Elliott Wave Principle is a concept that is almost essential for anyone thinking about starting Forex trading.
So who is it effective for?

If any of the following items apply to you, try to learn the basics of the Elliott Wave at least.

The hurdles many people encounter

• You don’t know where to place stop losses. Or you’re using fixed pips and you quickly hit the stop loss.
• How far will it extend? What should you use as a benchmark? You don’t know where to set the target value.
• You can’t grasp the trends and ranges across many timeframes.
• For example, when on daily you expect upward movement, on hourly downward, on 15-minute upward—things become unclear.
• Using multiple timeframes confuses your mind and you end up trading on impulse. You don’t know what to do.
• Which wave am I aiming for?
• For example, how long should I hold a position?
• How much price movement should I target?
• What kind of trades should I make?
• I’m not fully utilizing the techniques I’ve learned.

Elliott Wave for predicting market direction

Structure of Elliott Waves

The Elliott Wave consists ofimpulse waves andcorrection waves.

• Impulse waves are 5 waves
• Correction waves are 3 waves

in total.

I will explain with a simple diagram.

I will explain using an uptrend as an example.
The blue arrows show a rising trend formed by 5 waves (rising 3 waves and falling 2 waves).
The upward arrows are the impulse waves and the downward arrows are the correction waves.
If you subdivide the impulse waves further, they split into 5 waves (the 5 waves highlighted with red arrows).

All waves are comprised of rising and falling movements to form the pattern.

A little more detail

If you look more closely at the impulse and correction waves within them,

you can see that a single peak is formed by rising five waves and falling three waves.
This is the basic concept of the Elliott Wave.

(If you understand up to here, you can consider it practical knowledge.)
If you drill down further, in every hierarchy the sequence is formed by five rising waves and three falling waves.
This isthe fractal structure of waves.
At first, it may be hard to grasp, so please memorize it by rote.

• Impulse waves: 5 waves
  
• Correction waves: 3 waves; this is one set
  ↓
  ↓ When subdivided
  ↓
  
• Impulse waves: 21 waves
  
• Correction waves: 13 waves
  Within a large single wave there are 5 waves + 3 waves, and within them there are 21 waves + 13 waves.
  This sequence continues.

That’s all. It may sound theoretical and intimidating, but it really is just that simple.

There are more rules for Elliott Wave counts.

Even if you struggle, please remember this. It is a key rule.

Rules of the Wave(Must memorize)

1. The second wave never retraces more than 100% of the first wave (the start of wave 1 cannot be breached by wave 2)

2. Impulse waves always consist of 5 waves. (*diagonal triangles are an exception)
   

3. Correction waves are either 3 waves or form a triangle
   

4. In a cycle of 5 waves, unless it is part of a diagonal triangle, waves 4 and 1 do not overlap (applies only to wave 3)

5. Within impulse waves, wave 3 is never the shortest
   

6. An impulse wave can have only one extension; this implies somewhere there will be an extension

7. The other two impulse waves without extensions tend to be similar in time and magnitude

8. Extensions are generally within the five-wave structure. Note that wave 3 is the most common to extend, followed by wave 5; wave 1 rarely extends.
   

Extensions

Extensions are simply described asthe prolongation of a wave.

That explanation is not very clear, is it? It’s a bit sloppy.

Please look at the part labeled wave 3 in the diagram above.

Within wave 3, you can see wave 5. That is the extension.

However, in practice, it is difficult to determine which wave is extending.

I think of it as the lower-level waves being more clearly visible.

Rather than debating extensions,it is more important to clearly consider the target values of that wave.

(In practice, counting with wave 3 is usually sufficient.)

How to calculate the target values for each wave

1. The length of the wave is the base (major) value
2. The length is often 50% (half retracement) or 61.8% of the previous wave. Note: for wave 2 a full retrace is also common, so be careful
3. The length is 1.618 times wave 1; if it exceeds that, it may become 2x or 2.618x. In practice, 2x to 2.618x is common
4. The length of a wave 3 is 38.2% or 50% of the total length of waves 1-3; if it exceeds 50%, there is a possibility of miscount
5. The length of wave 5 is equal to wave 1 or 61.8% of wave 3

Finally, the names of the waves

Whether on a large or small scale, the naming is the same, so please remember it.

First comes the startwaves 1, 2, 3, 4, 5These are the impulse waves

Then comesA waves, B waves, C wavesthe correction waves

From here, consider this set asone set.

Once you can use Elliott Waves...

You can grasp the overall chart flow. You can clearly identify the trend direction. It becomes a foundational concept that is widely applicable.

In Elliott Wave theory, there is no such thing as a trendless state.

The premise is that you are always within a trend.
Viewed from the big picture, the range will clarify which way it will break, making it easier to plan your trade. Analyzing the whole, deciding which wave you will trade, is a highly practical approach.

Elliott Wave has a lot to memorize and can be discouraging, but once you learn it, it becomes a ready-to-use trading strategy.
There is a lot to memorize, but once you know the basics, it’s enough.

Once you have a basic understanding, your current technical analysis becomes much more efficient.
People often say“trendlines alone win”or“moving averages are all you need”to illustrate the idea, butthat’s not trueElliott Wave Theory: anything with -theory in the name is something you should know.
For example

Dow Theory or Ichimoku Time Theory, Price Range Theory, Time Theorythese are major concepts and worth learning.

The “-theory” concepts involve lots of memorization, which can deter people, but they are important precisely because they are challenging to approach.

Mastery of these theories strengthens your understanding. Please try to learn them.
I will try to explain them as clearly as possible, but if anything is unclear or you’d like more explanation, please contact me.