Elliott Wave principles are a technical analysis method used to analyze price movements in financial markets. Developed by Ralph Nelson Elliott, these principles aim to trace the psychological cycles in the market.Here are the key points of Elliott Wave principles:Study of Waves: Elliott defines price movements as waves progressing in a specific pattern, considered as part of the main trend.Impulse Waves: Elliott describes price movements as a cycle of five waves. This cycle consists of three rising waves (1, 3, 5) and two falling waves (2, 4). Typically, these five waves indicate the direction of the main trend.Correction Waves: Correction waves, moving in the opposite direction of the main trend, usually consist of three waves (A, B, C). These waves represent a short-term correction against the main trend.Fibonacci Ratios: Elliott often uses Fibonacci ratios to determine the relationships between price movements. These ratios can help identify potential support and resistance levels.Zigzag, Flat, and Triangle Formations: In Elliott Wave theory, it is believed that market movements often follow specific formations such as zigzag, flat, and triangle. These formations can assist in understanding the structure of price movements and predicting future trends.Elliott Wave theory is a complex analytical method that can help investors predict future price movements and understand market trends. However, the accuracy of this approach is subject to different opinions, and it may not always be reliable when used in isolation.
Elliott called sideways combinations of corrective patterns double threes and triple threes. While a single three is any zigzag or flat, a triangle is an allowable final component of such combinations and in this context is called a three. A double or triple three, then, is a combination of simpler types of corrections, including the various types of zigzags, flats and triangles. Their occurrence appears to be the flat corrections way of extending sideways action. As with double and triple zigzags, each simple corrective pattern is labeled W, Y and Z. The reactionary waves, labeled X, can take the shape of any corrective pattern but are most commonly zigzags. Figures 18 and 19 show two examples of double threes. 27 Figure 18
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Figure 19 For the most part, double threes and triple threes are horizontal in character. One reason for this trait is that there is never more than one zigzag in a combination. Neither is there more than one triangle. Recall that triangles occurring alone precede the final movement of a larger trend. Combinations appear to recognize this character and sport triangles only as the final wave in a double or triple three. All the patterns illustrated in this booklet take the same form whether within a larger rising or falling trend. In a falling trend, they are simply inverted. 28 GUIDELINES OF WAVE FORMATION
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ALTERNATION The guideline of alternation states that if wave two of an impulse is a sharp retracement, expect wave four to be a sideways correction, and vice versa. Figure 20 shows the most characteristic breakdowns of impulse waves, both up and down. Sharp corrections never include a new price extreme, i.e., one that lies beyond the orthodox end of the preceding impulse wave. They are almost always zigzags (single, double or triple); occasionally they are double threes that begin with a zigzag. Sideways corrections include flats, triangles, and double and triple corrections. They usually include a new price extreme, i.e., one that lies beyond the orthodox end of the preceding impulse wave. Figure 20
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DEPTH OF CORRECTIVE WAVES No market approach other than the Wave Principle gives as satisfactory an answer to the question, How far down can a bear market be expected to go? The primary guideline is that corrections, especially when they themselves are fourth waves, tend to register their maximum 29 retracement within the span of travel of the previous fourth wave of one lesser degree, most commonly near the level of its terminus. Note in Figure 21, for instance, how wave 2 ends at the level of wave four of 1, and how wave 4 ends at the level of wave four of 3. Figure 21
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