Elliot Wave Rules
The Elliott Wave Theory is named after Ralph Nelson Elliott. Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves and is true for both Bear and Bullish trends. It is basically the herd mentality of the market traders.
Elliott Wave Theory is very complicated so I have concentrated on the main principles below to help everyone understand the explanations of the indicators I use for opening and closing a trade as explained at Trading Strategy indicators – With Trend and Trading Strategy indicators – Trend Reversal
The Three Hard Rules (These cannot be broken)
- 1. Wave 2 cannot retrace more than 100% of Wave 1
- 2. Wave 3 can never be the shortest of the three impulse waves
- 3. Wave 4 can never overlap Wave 1
- 1. In many cases if Wave 2 is simple then Wave 4 is most likely to be more complex and vice versa. (The 3 Hard Rules still apply)
- 2. If Wave 3 is the longest then very often Wave 1 and Wave 5 tend to be approximately the same length
The chart below is a Daily Chart for United technologies Corp and highlights both points very well.