Elliott Wave Pattern Analysis
Elliott wave pattern analysis is an extremely powerful technical analysis method. Wave pattern analysis can be used to determine exactly where a stock may be at within its current trend. By learning the different types of wave patterns that develop, you can learn to identify different trading opportunities within each pattern.
Therefore, Elliott wave pattern analysis can help you calculate very specific price targets for buying and selling shares. I owe most of my current successes to my ability of being able to identify Elliott wave patterns on charts. Candlestick patterns are key tools to help identify the begging and end of potential wave patterns.
Complete 8 Wave Cycle
The below illustration represents a completed 8 wave cycle that developed in a bull market. A complete Elliott wave cycle typically consists of 8 basic waves. These 8 waves are subdivided into an Impulse wave pattern (Waves 1-5) and a corrective wave pattern (Waves A-C). The corrective wave pattern illustrated here is a Zig-Zag wave pattern.
Bullish 8 Wave Cycle
The above completed cycle can be subdivided into several different types of wave patterns, most of which are illustrated below. For example, Waves 1-5 form a Bullish Impulse wave pattern while Waves A-C form a Zig-Zag wave pattern.
Click on any of the below illustrations to learn more about the requirements, characteristics & observations, trading strategies and real chart examples for that particular wave pattern.
Wave Pattern Personalities & Identification Techniques
As waves develop, they tend to exhibit certain tendencies or qualities. The following link will assist you with learning about wave personalities from the beginning Wave 1 to the ending Wave C. Learning the personalities of the different waves will also help you overall in trying to identify wave patterns on charts.
- Bullish Impulse Wave Pattern Characteristics & Wave Personalities
- Wave Pattern Identification Techniques
The Trend of 1 Larger Degree
The same wave patterns that I illustrate below can develop on 5 minute candlestick charts, daily candlestick charts, weekly candlestick charts and monthly candlestick charts. Learning wave pattern personalities and identification techniques will assist you in identifying the overall degree of trend for a stock’s share price.
Wave Pattern Rules
There are specific rules to wave patterns that must be followed; these rules also help to correctly identify wave patterns. Through deductive reasoning, the rules for wave patterns can help you determine where a stock is at in its overall wave structure by simply knowing what wave patterns can, and more importantly, cannot do.
While I discuss most of the important rules and guidelines for the wave patterns illustrated below, I recommend having a copy of the Elliott Wave Principle by Frost & Prechter by your side as a complete reference tool for all wave patterns.
Motive Wave Patterns
Motive wave patterns advance the share price of a stock, usually in the same general direction of the overall stock market. There are two types of Motive wave patterns – Impulse wave patterns and Diagonal wave patterns.
Impulse Wave Patterns
Impulse wave patterns are a sub-category of Motive wave patterns. Impulse wave patterns are the key wave pattern that develops to advance the share price of a stock. A Bullish Impulse wave pattern advances the share price upwards. A Bearish Impulse wave pattern advances the share price downwards.
Impulse wave patterns consist of 5 total waves. Waves 2 and 4 are considered counter-trend waves.
Bullish Impulse Wave Pattern
Bearish Impulse Wave Pattern
Bullish Diagonal Wave Patterns
Diagonal wave patterns are another sub-category of Motive wave patterns. Diagonal wave patterns and Impulse wave patterns can look almost identical. Both consist of a 5 wave pattern. However, the “devil is in the details”. The major difference between the two wave patterns is in Wave 4. In a Diagonal wave pattern, Wave 4 enters into the territory of Wave 1. That is the main difference between a Diagonal wave pattern and an Impulse wave pattern.
When you examine the differences between the illustrations for Leading and Ending Diagonal wave patterns, you will notice there are no differences except for the name. The only significant difference is where they appear in a trend. A Leading Diagonal wave pattern appears in Wave 1 of a Bullish Impulse wave pattern while an Ending Diagonal wave pattern appears in Wave 5 of a Bullish Impulse wave pattern.
Bearish Diagonal Wave Patterns
Bearish Diagonal wave patterns….
Corrective Wave Patterns
There are a several different types of shapes that a corrective wave pattern can develop into. The types of corrective wave patterns can be sorted into 3 main classifications: Zig-Zags, Triangles and Flats. When you see or are anticipating the beginning of a corrective wave pattern, it is almost always best to let Wave A develop and start rebounding before trying to figure out which pattern it might be.
Zig-Zag Wave Patterns
After the completion of a Motive wave pattern, some type of corrective wave pattern will develop. Corrective wave patterns develop in the opposite direction of the Motive wave pattern.
Statistically, Zig-Zag wave patterns are the most common type of corrective wave pattern to develop after the completion of an Impulse wave pattern. From a time perspective, Zig-Zag wave patterns develop swiftly, inflicting pain with rapidly decreasing prices.
Bullish Zig-Zag Wave Pattern
Bearish Zig-Zag Wave Pattern
Double Zig-Zag Wave Patterns
A Double Zig Zag wave pattern is just that – two Zig-Zag wave patterns put together. From a time perspective, Double Zig-Zag wave patterns tend to last longer than “twice” the amount of a regular Zig-Zag wave pattern as it is a very complex looking corrective pattern.
Triangle Wave Patterns
Triangle wave patterns are another type of corrective wave pattern; there are several different types of triangle wave patterns. Triangle wave patterns tend to keep the trend going that preceded its development. It is very common for a Triangle wave pattern to develop in a Wave 4 of a larger Impulse wave pattern.
Triangle wave patterns develop with a lot of volatility, as you can see by the illustrations. Inside each Triangle are several mini Zig-Zag wave patterns. In order to identify the different Triangle wave patterns, compare Waves C-E in the illustrations.
Successfully trading Triangle wave patterns involves staying long until the breakout is complete. The breakout can be considered complete when an Impulse wave pattern develops during the breakout. When the Impulse wave pattern is complete, your will want to exit positions and lock in gains. The long-term trend is over.
Running Triangle Wave Patterns
Expanding Triangle Wave Patterns
Barrier Triangle Wave Patterns
Contracting Triangle Wave Patterns
Flat Wave Patterns
Flat wave patterns tend to develop after a very strong, bullish uptrend. Some of the Flat wave patterns even push a stock’s share price to new highs. Flat wave patterns are very commonly found in a Wave 4 of a larger Impulse wave pattern. Pay close attention to the placement of Waves A-C to help identify the different types of Flat wave patterns.
A regular Flat wave pattern can look very similar to a Zig-Zag wave pattern. It can be hard to distinguish between the 2 patterns by just looking at my illustrations. The differences between the two patterns though is time and steepness of Wave A.
Basically a Zig-Zag wave pattern corrects sharply and more swiftly than a Flat wave pattern. A Flat wave pattern typically has more of a sideways correction, or a “flatter” looking correction for lack of a better term. It is hard to pick up the “flatness” from my illustrations.
“Regular” Flat Wave Patterns
This is a “regular” Flat wave pattern. For a “regular” Flat wave pattern, Wave B does not go past the beginning of Wave A. Wave C breaks below Wave A, but usually not by very much.
Running Flat Wave Patterns
Notice how Wave B in an Expanded Flat wave pattern pushes back above where the correction started? This can make it very confusing and hard to identify. It can easily be confused to be part of the uptrend or part of a Bullish Impulse wave pattern.
A Running Flat wave pattern typically develops in a very bullish market and after a strong uptrend. Buyers step in to buy all the pullbacks and Wave C never breaks back below Wave A.
Expanded Flat Wave Patterns
The Expanded Flat wave pattern is similar to the Running Flat wave pattern. The difference between these 2 patterns is Wave C. In an Expanded Flat wave pattern, Wave C breaks below the low from Wave A in the pattern. This is typically caused by some type of news event near the end of the pattern that causes investors to sell out at exactly the wrong time. It is time to be buying and going long near the end of a Flat wave pattern, not selling.
