Elliott wave
Family VI · Charts & indicators
Not to be confused with fibonacci retracement, market structure, chart pattern.
Elliott wave is a chart-interpretation method that treats a market's price history as a nested, self-similar pattern of waves. It holds that trends unfold in five waves in the direction of the larger trend and three waves against it, with each of those waves subdividing into smaller versions of the same structure. The method is used to label past price action and to project where the current wave may end.
Wave structure and degrees
The basic unit is the motive (or impulse) sequence of five waves, conventionally numbered 1 to 2 to 3 to 4 to 5, followed by a corrective sequence of three waves, lettered A, B and C. Waves 1, 3 and 5 move with the trend; waves 2 and 4 are counter-trend pullbacks. The three corrective waves move against the trend of the larger sequence.
Because each wave subdivides, the same pattern appears at many scales, called degrees. A wave on a daily chart may itself be a subwave of a wave on a weekly chart. Analysts label degrees with names such as Primary, Intermediate and Minor, though the naming conventions vary between practitioners.
Three rules are commonly stated for a valid five-wave impulse: wave 2 never retraces more than 100% of wave 1; wave 3 is never the shortest of waves 1, 3 and 5; and wave 4 does not overlap the price territory of wave 1, except in certain diagonal formations.
Worked example
An analyst labels an advance on a daily chart as a five-wave impulse. Wave 1 runs from 100 to 120. Wave 2 retraces to 110, which is less than 100% of wave 1, so the rule holds. Wave 3 then extends from 110 to 170, a length of 60 points, longer than wave 1's 20 points. Wave 4 pulls back to 155, which stays above the 120 peak of wave 1, so there is no overlap.
The projection is not a guarantee. It is a conditional target that depends on the wave count being correct, and alternative counts are usually available.
Use and limitations
Elliott wave is applied to project the end of a current wave and the start of the next, and to set targets for entries and exits. Because the count is subjective, two analysts can label the same chart differently, and a count is often revised after the fact. The method is therefore usually combined with other tools such as trendlines, moving averages or momentum indicators.
Fibonacci ratios are frequently used alongside Elliott wave to estimate wave lengths and retracement levels, but the two are separate techniques. Elliott wave does not specify position size, risk limits or timeframes; those depend on the trader's plan and on the market being analysed.
Often confused with
- fibonacci retracement
- A Fibonacci retracement is a charting tool that plots horizontal lines at ratios derived from the Fibonacci sequence—typically 23.6%, 38.2%, 50%, 61.8%, and 78.6%—between a swing high and swing low to identify potential support or resistance levels.
- market structure
- Market structure is the observable sequence of swing highs and swing lows on a price chart, classified as trending or ranging according to whether those swings extend in one direction or overlap.
- chart pattern
- A chart pattern is a recognisable geometric shape formed by a sequence of price bars or candles on a price chart, used as a visual aid for describing past price behaviour and possible future price movement.
See also
- forex technical analysis indicators
- price action
- fundamental analysis
- support and resistance
- technical analysis
- fibonacci