Elliott Wave Patterns & Theory
Elliott wave theory is a form of technical analysis that was developed by Ralph Nelson Elliott, better known as R.N. Elliott, in the 1930's. It consists of an intricate set of Elliott wave patterns.
Through R.N. Elliott's study of stock market prices, he observed that prices tended to advance and retreat in similar patterns, or waves. He also noticed that these wave patterns occurred on different degrees of time and scale, meaning the same wave pattern could be seen on a 5 minute candlestick chart as well as on a monthly candlestick chart. I refer to this as the "trend of one larger degree".
All of the wave patterns that R.N. Elliott identified not only build of one another, but also have the ability at most points to morph into a similar, but different, wave pattern.
Waves also unfold in multiple layers. These layers are often referred to as the wave's degree. All of this is wrapped up together to form Elliott wave theory.
Because most wave patterns are similar but form in opposite directions, it is extremely critical to determine the overall trend of the stock or index that you are looking at before trying to determine its movements on a shorter-term basis.
So now that you have scratched the surface with Elliott wave theory, let's start with some of the basic wave patterns that R.N. Elliott identified.
Elliott Wave Patterns
There are more Elliott wave patterns than I illustrate below. The following wave patterns are the basic wave patterns to introduce you to Mr. Elliott's wave concepts and theories.
Please note, Trendy Stock Chart members have access to an advanced Elliott wave area. I discuss all the wave patterns and provide detailed illustrations for each, not just the basics that I review below. I also review each wave pattern's requirements & guidelines, and provide previous real-life examples of the patterns. And if that isn't enough, I also discuss and illustrate various trading tips for the wave patterns.
As you go through some of the Elliott wave patterns that are illustrated below, take notice how the same wave patterns form in a bull market and a bear market; the patterns tend to be duplicates of each other, just going in opposite directions. This mirroring of patterns in bull and bear markets applies to most wave patterns identified by R.N. Elliott.
Motive Wave Patterns
Let's start with motive wave patterns. Motive wave patterns are the most common wave patterns used for advancing or retracing a stock's share price. Motive wave patterns can develop in both bullish and a bearish markets, only the direction in which they develop differs.
There are 2 different types of Motive wave patterns, an Impulse wave pattern and a Beginning Diagonal wave pattern. The Impulse wave pattern is the more common of the motive wave patterns, which I've illustrated below. Waves 1 through 5 of the pattern develop in sequential order.
Zig-Zag Wave Patterns
There are several different types of corrective wave patterns. These next illustrations represent the most common type of corrective wave pattern, a Zig-Zag wave pattern. Zig-Zag wave patterns form in both bull and bear markets. These corrective wave patterns tend to develop right after an Impulse wave pattern developed. Waves A-C of the Zig-Zag wave pattern develop in alphabetical order.
Typical Completed 8 Wave Cycle
So a stocks share price starts advancing to the upside or downside through the development of an Impulse wave pattern. That Impulse wave pattern then corrects since every advance (up and down) has a correction. The most common corrective wave pattern is a Zig-Zag wave pattern. Put the Impulse wave pattern and the Zig-Zag wave pattern together and you get a complete 8 wave cycle.
Pull up your favorite stock chart. Do you see any of the above wave patterns on it? Elliott wave analysis does not come easy and takes a lot of practice, so you might not. As a Trendy Stock Charts member, I provide all sorts of resources to help with the identification of a stock's Elliott wave pattern.
I will even look at your favorite stock chart and provide my projection of where it is at in its Elliott wave pattern. My projections will be supported with different forms of technical analysis.
Elliott wave theory is one of my favorite methods of technical analysis. Learning how to apply and trade stocks using this theory is one of the largest contributors to my success the last several years. I can identify the most probable Elliott wave pattern on almost every stock chart.
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I provide guidelines for wave pattern identification, cheat sheets and tips to help identify wave patterns and will also provide my personal observations and trading tips for wave patterns on any stock chart. And if that isn't enough, I will use other forms of technical analysis to either support or disprove my Elliott wave analysis.
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