Indicators / Structure / Elliott Wave
Elliott Wave Explained: Impulse, Correction and the Core Rules
Quick answer
Elliott Wave Theory says markets move in a 5-wave impulse in the trend's direction, followed by a 3-wave correction. Three rules decide whether a count is valid. Its real value is in setting clear invalidation levels, not in predicting exact targets.
Video: Elliott Waves for Beginners.
What Elliott Wave describes
Ralph Nelson Elliott observed that crowd psychology creates repeating patterns. Trends advance in five waves (1 to 5) and correct in three (A, B, C). Each wave contains smaller waves of the same shape.
The three rules
- Wave 2 never retraces more than 100% of wave 1.
- Wave 3 is never the shortest of waves 1, 3 and 5.
- Wave 4 does not overlap the price territory of wave 1 (in standard impulses).
Break any rule and the count is wrong, which gives you a clear invalidation level.
Common guidelines
| Wave | Typical behaviour |
|---|---|
| 2 | Deep pullback, often 50% to 61.8% of wave 1 |
| 3 | Strongest wave, often 1.618 × wave 1 |
| 4 | Shallow, sideways, often 38.2% of wave 3 |
| 5 | Final push, often with momentum divergence |
How to use Elliott Wave
1. Start from the bigger picture
Count on a higher timeframe first, then zoom in.
2. Use the rules as stops
The point where a rule would break is where your idea is wrong. That makes a natural stop.
3. Keep alternate counts
More than one count is usually possible. Hold a main and an alternate, and let price decide.
Common mistakes
- Forcing a count. Not every move is a clean wave.
- Ignoring invalidation. A broken rule means a broken count.
- Treating targets as certain. Ratios are guidelines.
What to pair Elliott Wave with
- Fibonacci for wave targets and retracements.
- RSI or MACD divergence to spot wave 5.
- Multiple timeframes to line up wave degrees.
Elliott Wave FAQ
What are the Elliott Wave rules?
Wave 2 never retraces all of wave 1, wave 3 is never the shortest, and wave 4 does not overlap wave 1.
Which wave is the strongest?
Usually wave 3, which is often 1.618 times the length of wave 1.
Is Elliott Wave reliable?
It is subjective. Its main value is defining where an idea is wrong, not predicting exact targets.