Training Video_20

 

Introducion to Elliott Waves

With this video I am introducing you to a series of Elliott waves analysis. We will have a look at impulse and correction waves and Elliott cycles.

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Hallo, Sylvain Vervoort with technical analysis part 20. With this video I am introducing you to a series of Elliott waves analysis. Pay a visit to my website at stocata dot org and have a look at my new book “Capturing Profit with Technical Analysis”. The purpose of this video series is to teach you how to trade successfully applying technical analysis techniques.

One of the only tools that can give you an idea as to which direction the stock price will move next is Elliott wave analysis. With short, medium, and long-term Elliott wave trend analysis, we can have a pretty good indication if price has a better chance of going up or going down in these different time periods. As an added bonus, an Elliott wave can give you some price target too. Your Elliott wave count does not have to be perfect. You will have to review counts regularly. What is important, though, is that price makes a move in the expected direction. At the end of the theoretical part I will give you a small tool that will help you to make Elliott wave counts with a few examples.

During an illness in the mid-1930s, Ralph Nelson Elliott discovered the correlation between human emotion and trend patterns contained within price charts.  Elliott discovered different patterns that repeated themselves in form but not necessarily in size or length of time; these patterns could always be subdivided into smaller waves within the framework of certain rules. He called this phenomenon the “wave principle.”

There are two basic waves in Elliott wave theory: a five-wave impulse pattern in the direction of the main trend and a three-wave correction pattern against the main trend. In a later stage, Elliott used Fibonacci numbers together with the waves to predict price targets. A trend signals the main direction in which prices are moving; corrections move either against the main trend or sideways. In Elliott wave terminology, these are called impulse waves and correction waves. In this figure, you can see that an impulse wave consists of five waves: three in the direction of the uptrend or downtrend , the waves 1, 3, and 5 and two against the trend, the waves 2 and 4.

The correction wave consists of three waves: A, B, and C. Impulse waves are identified by numbers; correction waves are identified by letters. Here you can see an uptrend impulse wave followed by a correction wave.

Impulse waves 1, 3, and 5 move in the direction of the trend and therefore, consist of another impulse wave of a lower degree. 

We know already that the up trending and down trending correction wave has three waves. Waves A and C point in the direction of the correction; wave B is moving against this direction. Waves A and C in a correction wave move in the direction of the correction trend and are therefore impulse waves, consisting of five waves. Note that waves 2 and 4 in an impulse wave are also correction waves.

Another possible correction pattern is a triangle correction. Here you can see a triangle correction in an uptrend and in a downtrend. A triangle correction consists of five correction waves. IMPORTANT! A triangle correction is always part of an ABC correction wave.

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Any impulse wave can be interpreted as a correction wave, but it is, of course, wrong to do this because the Elliot wave count will be completely wrong. In this figure with a longer 3 wave, followed by a 4 wave with an endpoint above the top of wave 1, must be labeled as an impulse wave. So it is wrong to label wave 3 as an A wave, consisting of a small abc sub-wave. Respecting all the rules is  therefore utmost important.

An impulse wave and a correction wave together make a cycle. Here you see:
The biggest wave:                     [1] to [2] consist of 1 + 1 = 2 waves
The biggest subdivision:             (1) to (C) consist of 5 + 3 = 8 waves
The next subdivision:                 1 to capital C consist of 21 + 13 = 34 waves
The following subdivision:          Roman I to small c consist of  89 + 55 = 144 waves
This subdivision is not limited.

A typical up impulse wave [1] to [5], with an extension of a lower degree wave (1) to (5) in wave ([3]. But also this wave has another extension of a lower degree with waves 1 to 5. From the start of the main impulse wave [3] up, you can take a long trade around $29 and stay in the trade based on the Elliott wave count until wave [5] is confirmed above the wave [3] at around $39.5. A nice profit thanks to the fact that you could stay in the trade based on the Elliott wave count.

Continuing the previous chart after the top [5], which is actually a new longer term wave 1 of a higher degree, we expect a correction wave 2 for this longer term up move. It turned out a correction wave just staying a fraction above the start of the previous up wave. The correction wave is a double zigzag correction with wave [W] to [Y] with both zigzag waves (A) to (C) where both (A) waves have another extension of a lower degree with waves A to C.

This is the end of the introduction to Elliott waves. Next video we will look at the basic impulse wave's rules and price targets. Tell your friends about these videos and while visiting my website you may want to order my new book “Capturing Profit with Technical Analysis”, with a complete trading system based on technical analysis. See you in my next video!

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