In this chapter we will talk about Elliott’s waves and how they could help us understand price trends .
Elliott waves support the principle that the market is cyclical and can be divided into waves. The two main waves are the impulsive one, where the price increases substantially, and the corrective wave called ZigZag in which the price decreases. Each of these two waves can then be then decomposed into smaller waves.
Taking for example the impulsive wave and numbering the alternation of points of maximum and minimum relative to the bullish waves, and instead marking with letters the points of maximum and minimum relative in the Bearish wave, we have the following waves:
WAVE 1: go up to 1 then 2,3,4,5
WAVE 2: I go down to a then b, c (in downtrend)
WAVE 3: go up to 1 then 2,3,4,5
WAVE 4: I go down to a then b, c (donntrand)
WAVE 5: I go up to 1 then 2,3,4,5
Image 1: representation of Elliot waves
Then we will have the corrective wave that is drawn with the same principle.
What is then difficult is to be able to correctly identify the waves on the price chart, also positioning on the correct timeframe.
Below is an example of a 12345 impulsive wave, still in training, on the #ETH chart:
Image 2 : tradingview – eth – example of wave 12345 still in formation
From this theory also derive some corrective patterns as can be seen in image 3 :
Image 3 : representation of corrective patterns derived from Elliot waves
We have already seen some of these patterns in previous articles but without going into the details of the underlying theory.
- Images: image1 and image3 taken from google images
- Achille Fornasini, “Financial markets: choice and management of speculative operations – Methods and systems of modern Technical Analysis to support operational decisions”, 1st edition of 1996, ETAS