What is the Elliott Wave Theory?
Named after Ralph Nelson Elliott, the Elliott Wave Theory is a method of
technical analysis that identifies for recurring price patterns related to
cycles in investor sentiment and psychology.
The theory isolates waves identified as motive waves that form a trend,
and corrective waves that counter the trend.
The idea is that each set of waves is ingrained within a larger set of
waves that follow the same impulse/corrective pattern, described in
fractality.
What is this?
This is a cheat sheet to use along your journey of becoming an elite
elliotician. This will absolutely help with the learning curve and also be
an excellent resource to have quick access to all the major rules,
guidelines, structures, and Fibonacci measurements.
For more in-depth analysis on Elliott Waves, download & STUDY Elliott
Wave Principle, known as “The Bible of the Elliott Wave Theory”, (Yes,
it’s free!!).
Let’s Begin.
The Three Cardinal Rules:
Wave 2 cannot more than 100% of wave 1
Wave 3 cannot be the shortest of the three impulse waves
Wave 4 cannot overlap with the price territory of wave 1 (Except in
the rare event of a diagonal triangle pattern)
Motive Waves
Impulse:
An impulse is the most common motive wave, which is always
subdivided into five waves (1-3-5 up, 2-4 down [or vice versa]). They
move in the same direction of the trend, and are the easiest to
recognize.
Rules:
An impulse consists of 5 internal waves.
Wave 1 and 5 always have to be an impulse, or a diagonal
(Leading for wave 1 – Ending for wave 5)
Wave 3 always has to be an impulse.
Wave 3 can never be the shortest wave
o It can be shorter than wave 1 or 5, but never the shortest
Wave 2 cannot retrace more than 100% of wave 1
Wave 2 can be any corrective pattern
o Except a triangle
Wave 4 can be any corrective pattern
Wave 4 can never move beyond the end of wave 1 (Otherwise it is
a diagonal)
Guidelines:
Wave 1 is the least common wave to extend
Wave 5 should end with momentum divergence (RSI is the
simplest oscillator to spot this)
Wave 5 can fail to go beyond the end of wave 3
o This is called truncation, but it is not very common
Truncation gives warning of underlying weakness or
strength in the market
Wave 3 usually has the greatest extension
o Occasionally two waves will extend
Never will all three waves extend
When wave 3 extends, wave 5 tends to equal wave 1 in length
Waves 2 and 4 tend to create alternation between each other
o See last page for more details on alternation
Wave 2 typically retraces to deeper levels of wave 1, than wave 4
does relative to wave 3
Wave 2 usually forms as a zigzag or double/triple zigzag
Wave 4 usually forms as a triangle, double/triple threes, or flat
Extended waves can contain exaggerated subdivisions within
them
Usually two of waves 1, 3 & 5 exhibit a Fibonacci ratio
Channel lines and Fibonacci targets are inferior to the wave
count
In most cases, wave 3 has the highest volume
o If volume during the 5th wave is as high as the 3rd, an
extended 5th wave is expected
Fibonacci Extension & Retracement Ratios:
Wave 2 – Retracement
o 50%, 61.8%, 65%, 78.6%, or 88.6% of wave 1
Wave 3 – Extension
o 161.8%, 200%, 261.8%, or 323.6% of wave 1
Wave 4 – Retracement
o 14.6%, 23.6%, or 38.2%, 40% of wave 3
o Ideally it should not exceed more than 50%
If wave 4 does exceed 50% of wave 3, consider a
different count, but do not rule it out
Wave 5 – Extension
o Equal (100%) to wave 1
o Wave 5 is 61.8% of waves 1+3
Diagonal:
Diagonals move within two channel lines drawn from waves 1 to 3, and
from waves 2 to 4. There are two types of
diagonals; leading and ending. This is dependent on if they form at the
start (leading) or end (ending) of an impulse wave, or the form of wave
A (leading) or C (ending) of a zigzag.
There are also two wedge forms for leading diagonals; Contracting and
Expanding
Contracting Diagonal:
Wave 3 should be shorter than wave 1
Wave 4 should be shorter than wave 2
Wave 5 should be shorter than wave 3
Expanding Diagonal
Wave 3 should be longer than wave 1
Wave 4 should be longer than wave 2
Wave 5 should be longer than wave 3
Rules:
Leading diagonal subdivides into 5-3-5-3-5
Ending diagonal subdivides into 3-3-3-3-3
Leading diagonal can only form in subdivisions of wave 1 in an
impulse, or in wave A in a zigzag
Ending diagonal can only form in subdivisions of wave 5 in an
impulse, or wave C in a zigzag
Diagonals must move within the two channel lines or be within
10-15% of total movement
Wave 2 must not retrace more than 100% of wave 1
Wave 4 never moves beyond the end of wave 2
Wave 3 must be greater than wave 2 by price
The trend lines must converge, slope in the same direction
o Cannot be horizontal
Guidelines:
Diagonals are usually identified by overlapping wave 1 and 4
o There are cases where it does not overlap, but that should
be last resort
If wave 5 is smaller than wave 3, contracting diagonals can
overshoot its trend line during wave 5
o This is called a throw-over
Contracting ending diagonals can also undershoot its trend line
during wave 5
o This is called truncation
If wave 1 is a leading diagonal, wave 3 is usually extended
Decrease in candle size that takes a long time to increase in price
on low volume is a strong signal that an ending diagonal is
occurring
o This shows a decrease in momentum
Odds favor ending diagonals being followed by a strong reversal
as the preceding trend is exhausted
Fibonacci Extension & Retracement Ratios:
Contracting Diagonal:
Wave 2
o 61.8% to 88.6% of wave 1
Wave 3
o 78.6% to 100% of wave 1
Wave 4
o 38.2% to 50% of wave 3
Wave 5
o 61.8% to 100% of wave 3
Expanding Diagonal:
Wave 2
o 61.8% to 88.6% retracement of wave 1
Wave 3
o 127.2% to 161.8% of wave 1
Wave 4
o 61.8% to 88.6% retracement of wave 3
Wave 5
o 127.2% to 161.8% of wave 3
Corrective Waves
Zigzag:
Zigzag is a corrective 3 wave structure (5-3-5) labelled as A-B-C. The top
of wave B is prominently lower than the start of wave A. Occasionally,
there will be multiple zigzags that form when it does not reach its
measured target. These are called double zigzags and triple zigzags.
Rules:
Wave B may not move beyond the start of wave A
Waves A & C must subdivide into five waves
o Impulse or diagonal
Can only have one diagonal in Wave A or C
Wave B can be any 3 wave corrective pattern
Guidelines:
Fits well into a parallel channel
Wave C normally ends beyond the end of wave A.
o If it does not, it is a truncation
The ratio between A and C is usually equal to 100%
Zigzags can become extended into double or triple zigzags
o They are labeled W-X-Y (double zigzag) and W-X-Y-Z (triple
zigzag)
Fibonacci Extension & Retracement Ratios:
Wave B
o 50%, 61.8%, 78.6% or 88.6% retracement of wave A
Wave C
o 61.8%, 100%, or 161.8% extension of wave A
Waves A and C
o Usually equal in length (100%)
Flat:
A flat correction is an A-B-C corrective move structured 3-3-5. The
stronger the trend, the briefer the flat tends to be. There are three
types of flats: Regular, Expanding, & Running
Rules:
Waves A & B must subdivide into threes (ABC)
Wave C must subdivide into five waves (impulse or diagonal)
Wave A cannot be a triangle
Guidelines (Fibonacci Ratios Included):
Regular Flat:
B ends about the start of A (can be a little beyond)
o Wave B must be minimum 90% of wave A (If it ends at 85%,
it should be considered)
o Usually 90-105% of wave A
C ends about the end of A (100%-105%)
o If wave C fails to extend beyond wave A, it is considered a
truncated C wave
Expanded Flat:
B must be minimum 105% of A
o Usually between 105%-138% of wave A
C usually ends substantially beyond the end of A
o Wave C = 123.6% – 161.8% of wave A-B
Most Common
Running Flat:
B ends beyond the start of A
o Wave B = 123.6% of wave A
C fails to move beyond the end of A
o Wave C = 61.8% – 100% of wave A-B
Wave C is truncated
Least common, but very bullish or bearish depending on the
direction of the trend
Triangle:
A Triangle is a common 5 wave pattern labeled A-B-C-D-E that moves
counter-trend, and is corrective in nature. Triangles move within two
channel lines drawn from waves A to C to E, and from waves B to D,
usually on declining volume.
Rules + Guidelines:
Contracting Triangles:
Top trendline declining, bottom rising
Wave E either overshoots or undershoots the A-C trendline
Four of the five subdivision waves must be zigzags
It should not have more than one complex corrective wave
Most common triangle
Barrier Ascending/Descending Triangles:
*Same as the above contracting triangles except the following:
Top trendline flat, bottom rising for ascending
o Vice versa for descending
The B-D, or A-C-E trendline is horizontal
The movement out of the triangle is a short sharp thrust or
extended fifth wave
Expanding Triangle:
Top trendline rising, bottom declining
Very rare
Fibonacci Extension & Retracement Ratios: *Triangles rarely follow
retracement rules*
Contracting and Symmetrical Triangles:
In a triangle, at least two waves frequently have a 61.8%
relationship with their prior wave.
With a running triangle wave B should not go beyond 161.8% of
wave A
Expanding Triangles:
As a general rule, these triangles conform to 161.8% relationships
between the waves
B, C, & D may not be longer than 150% of the preceding
subdivision wave
o E may be longer
Combination Correction:
A double three or triple three combination is a complex corrective
pattern. It occurs when simple corrective waves develop together into a
larger corrective structure. They are usually horizontal in structure.
Rules:
Composed of two or (three) ABC corrective patterns separated by
one (or two) corrective pattern(s) in the counter direction, labeled
“X”
The first corrective pattern is labeled W, the second Y, and if there
is a third, “Z”
Doubles are denoted as A–B–C–X–A–B–C or abbreviated as simply
W–X–Y.
o A double presents itself as a 7 wave corrective structure
Triples are denoted as A–B–C–X–A–B–C-X-A-B-C or abbreviated as
W–X–Y-X-Z
o A triple presents itself as a 11 wave corrective structure
Doubles are common, Threes are rare
There cannot be more than one zigzag in a combination
There cannot be more than one triangle in a combination
Guidelines:
Double threes and triple threes are horizontal in formation
If a zigzag or flat looks too small to be the entire wave with
respect to the preceding wave, a odds favor a combination is
forming
Wave ‘X’ can be any corrective pattern, but is usually a zigzag
Fibonacci Extension & Retracement Ratios:
Double Three:
Wave X
o 50%, 61.8%, 76.4%, or 85.4% retracement of wave W
Wave Y
o 61.8%, 100%, or 123.6% extension of wave W
Cannot pass 161.8% of wave W
Triple Three:
Wave X
o 50%, 61.8%, 76.4%, or 85.4% retracement of wave W
Wave Z
o 61.8%, 100%, or 123.6% extension of wave W
Wave Y
o Cannot pass 161.8% extension of wave W
Wave Formation
Guideline of Alternation:
The guideline of alternation is a warning to expect a difference in the
next expression of a wave.
Impulse Waves:
The guideline of alternation states if wave 1 is short, then wave 3 is
likely to be extended, and wave 5 likely to be short again.
If wave 1 is extended, then wave 3 and 5 are most likely not extended. If
neither wave 1 nor wave 3 is extended, then wave 5 probably will be
extended.
If wave 3 is extremely long and overstretched, wave is 5 more in danger
of being truncated.
Corrective Waves:
The guideline of alternation states that if wave 2 of an impulse is sharp,
complex, and deep (in retracement), expect wave 4 to be a sideways,
simple, & shallow, and vice versa.
Elliott Wave Notation
Thanks for reading!!
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