Elliott Wave Rules

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


Some Observations/Guidelines

  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) arrow-down
  2. 2.       If Wave 3 is the longest then very often Wave 1 and Wave 5 tend to be approximately the same length arrow-up

The chart below is a Daily Chart for United technologies Corp and highlights both points very well.

elliott wave rules
Click on the image to enlarge.
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