| Signal Generation | Identification of five-wave impulses and three-wave corrections to determine trend direction and entry points |
| Entry Trigger | Entry at Wave 2/4 corrections in impulse direction or at completion of ABC corrections |
| Exit Strategy | Fibonacci projections for wave targets; wave structure completion signals exit |
| Risk Management | Stop-loss at wave invalidation levels; wave overlap rules define risk |
| Position Sizing | Risk 1-2% per trade based on wave invalidation distance |
| Optimal Conditions | Clear wave structure with proper alternation, Fibonacci relationships, and volume confirmation |
| Avoid When | Ambiguous wave counts, extended corrections, major news pending |
| Timeframes | Daily/Weekly for primary counts; Hourly for entry timing |
The three cardinal rules are: (1) Wave 2 can never retrace more than 100% of Wave 1, (2) Wave 3 can never be the shortest impulse wave among Waves 1, 3, and 5, (3) Wave 4 can never enter the price territory of Wave 1 in a standard impulse. If any rule is violated, the wave count is definitively wrong.
Wave 3 is typically the longest and strongest wave, often extending 1.618 times Wave 1. Entry at Wave 2 completion provides a clear stop (below Wave 1 start) and large potential reward. Wave 3 also shows strong momentum and volume, making it easier to ride. This creates the best risk-reward ratio of all wave positions.
Corrections complete at Fibonacci levels - Wave 2 typically at 50-61.8% of Wave 1, Wave 4 at 38.2% of Wave 3. Look for: (1) Price reaching Fibonacci zone, (2) Reversal candlestick pattern, (3) Volume spike on reversal, (4) Momentum divergence. Three-wave structure (A-B-C) should be visible before entering.
Zigzag: Sharp 5-3-5 structure; B retraces 38-78% of A; C typically equals or exceeds A; creates steep retracement. Flat: Sideways 3-3-5 structure; B retraces 90-100%+ of A; C approximately equals A; creates horizontal consolidation. Zigzags are common as Wave 2; flats are common as Wave 4.
Yes, Elliott Wave patterns are fractal - they appear on all timeframes from monthly charts to minute charts. However, higher timeframes (daily, weekly) produce clearer patterns with less noise. Match your analysis timeframe to your trading style: daily/weekly for swing trading, hourly for day trading.
Alternation suggests Waves 2 and 4 tend to differ in form. If Wave 2 is sharp (zigzag), Wave 4 is likely flat or triangle (sideways). If Wave 2 is flat, Wave 4 is likely sharp. Use this to anticipate Wave 4 structure and set appropriate entry expectations - don't expect deep Wave 4 if Wave 2 was already deep.
Develop preferred and alternate counts. Trade the preferred count but know invalidation levels for both. As price develops, one count usually gains probability while others are invalidated. Don't force a count - if price action doesn't fit, revise. Reduce position size when counts are ambiguous.
Diagonals are five-wave patterns where Waves 1 and 4 overlap, forming a wedge shape. Leading diagonals occur in Wave 1 or A position, signaling powerful trend ahead. Ending diagonals occur in Wave 5 or C position, signaling exhaustion and imminent reversal. Diagonals are the exception to the no-overlap rule.
Channels project wave termination zones. Draw initial channel after Waves 1-2, project Wave 3 target. Redraw 2-4 channel after Wave 4, project Wave 5 target. When Fibonacci extensions align with channel boundaries, strong confluence exists. Channel breaks can signal wave completion or count problems.
Wave 3 should show expanding breadth (more stocks participating, A/D line confirming). Wave 5 often shows divergence (fewer stocks, A/D failing to confirm). Volume should expand in Wave 3 and contract in corrections. Sentiment reaches extremes at Wave 2/C lows (fear) and Wave 5 highs (euphoria).
Start with swing detection using ZigZag, fractals, or ATR-based methods. Attempt to fit XABCD-like five-wave structures to recent swings. Validate against three cardinal rules. Calculate Fibonacci relationships for additional scoring. Generate multiple count scenarios and rank by rule compliance and Fib accuracy.
Wave 2 completions often align with Gartley (0.786 XA) or Bat (0.886 XA) PRZ levels. Wave 4 may contain harmonic patterns. Wave C termination often aligns with harmonic extensions. When Elliott target and harmonic PRZ converge, probability significantly increases.
Calendar spreads work well for Wave 4's sideways, time-consuming nature. Sell near-term options at Wave 4 range boundaries, buy longer-term at same strike. Profit from time decay during consolidation. Close or roll before Wave 5 breakout. Iron condors also work if Wave 4 range is defined.
Wyckoff accumulation often corresponds to larger Wave 2 or C completion. The Spring in accumulation equals Wave C end - best entry point. Wyckoff distribution often occurs during Wave 5. Upthrust After Distribution marks Wave 5 end. Use Wyckoff phases to confirm wave structure and timing.
Use walk-forward optimization (optimize on 60%, test on 40%, roll forward). Keep parameters minimal. Test across multiple instruments and market regimes. Verify patterns work in bull, bear, and ranging markets. Use out-of-sample validation. If in-sample results far exceed out-of-sample, overfitting exists.
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