Elliott Wave Pattern Identification Techniques
This page will offer several different tips on what I think are the keys to successful identification of Elliott Wave Patterns on a consistent basis. However since Elliott Wave identification is theoretical in nature, it require continued studying and application in order to become proficient with identifying wave patterns.
Before We Begin, Let’s Cheat!
Let’s start with a cheat sheet that I created – this cheat sheet can help Trendy Stock Chart members with identifying where a stock’s share price may be at in its overall 8 Wave Cycle Wave Pattern.
If you do not yet have a working knowledge of Elliott Waves, then I definitely recommend printing the below illustration. Keep it handy when reading my updates until you have a working knowledge of the different wave patterns. I tend to reference the various waves in the illustration quite a bit. This cheat sheet can help you visualize what I am talking about at times. So go ahead and print the below illustration or save it electronically if you use a 2 or 3 monitor system like I do.
The above cheat sheet illustrates a typical completed 8 wave pattern in a bull market, but the cheat sheet can be used for bear markets also – just turn the cheat sheet upside down!
Keys To The Elliott Wave Identification Process
Let’s walk through the process and techniques that I use to identify Elliott Wave Patterns on stock charts and charts for the major indices.
Begin With The Basic Elliott Wave Patterns
First and most importantly, it is imperative to have at least a working knowledge of the different types of Elliott Wave Patterns that can develop.
- Beginning Diagonal Wave Pattern
- Bullish & Bearish Impulse Wave Patterns
- Ending Diagonal Wave Pattern
- Zig-Zag Wave Pattern
- Triangle Wave Patterns
- Flat Wave Patterns
Without having at least this basic working knowledge, the chances for determining where a stock may be in any Elliott Wave Pattern diminishes significantly. I have several illustrations displaying the basic Elliott Wave Patterns and knowing their basic shapes is essential; knowing some of the finer details of each pattern is important but those can always be researched here at Trendy Stock Charts as I have illustrations and requirements for each of the following Elliott Wave Patterns listed above.
As you go through the various patterns above, consider printing out some of my illustrations and placing them in a binder to hold all the illustrations together. This binder can be used to collect notes the various illustrations and also be used to scribble some notes on different illustrations as well.
Utilize Weekly & Monthly Candlestick Charts
When you are first learning to identify Elliott Wave Patterns, start by using weekly and monthly charts. Do not attempt to use Elliott Wave Analysis on shorter-term charts, like daily candlestick charts, until you have a working knowledge of the different types of wave patterns and their requirements.
I like to identify a stock’s trend on the largest degree possible; using weekly and monthly candlestick charts helps me to accomplish this goal. I like to analyze Elliott Waves in a similar manner – I like to find the Elliott Wave Pattern on the largest degree possible and weekly charts as well as monthly charts help me do just that.
As you begin down the Elliott Wave yellow brick road, remember that Elliott Wave patterns can be difficult to visualize at first but with plenty of practice (trying to identify waves on previous chart history), seeing a stock’s trend and wave pattern will become easier over time and more repetitions.
I begin my Elliott Wave analysis with a 20 year monthly candlestick chart. If I could, I would go back further than 20 years however the trading platform that I use (Think or Swim) only has a 20 year look-back period.
Once I get the feel for the stock’s largest overall wave structure, I will usually switch chart views by next looking at a 5 year monthly candlestick chart and 3 year weekly candlestick chart. I want to get a closer look at more recent chart action after determining where this most recent action may be taking place in the overall wave pattern.
I then start trying to sub-divide the large wave structure into smaller sub-wave structures. Due to the numerous layers of wave development and how one wave can build off the results of a previous wave, I find it easier to start with the largest wave sequence possible and then drill down to the sub-wave details to confirm the larger wave structure.
Taking this “large-to-small” approach allows you to also calculate accurate price targets which can then also lead to building expectations for a stock’s share price – having at least a general idea of a stock’s intended price action over the next several weeks or months is extremely helpful in volatile stock market.
Identify The Largest Volume Spikes
When I am looking at the weekly and monthly charts as mentioned above, I am also scouring the volume section for the largest volume spikes that I can find on the chart. Volume spikes tend to happen at the following places, in order of probability:
- The middle of the current trend, which would be the equivalent of developing in a Wave 3 of a Bullish Impulse Wave Pattern
- The beginning of the current trend, which would be the equivalent of developing at or near the beginning of a Wave 1 in a Bullish Impulse Wave Pattern
- The end of the current trend, which would be the equivalent of developing at or near the end of a Wave 5 in a Bullish Impulse Wave Pattern
These large volume spikes help me to identify Impulse Wave Patterns and Corrective Wave Patterns, depending upon where the volume spike develops in relationship to the Wave Pattern taken as a whole.
Switch Back & Forth Between Arithmetic Scale & Log Scale Settings
Since Elliott Waves can be proportionate in either dollar or percentage terms, it is sometimes best to switch between arithmetic scale and log scale settings.
- Arithmetic scale settings are best used to identify wave patterns that are similar on a dollar basis
- Arithmetic scale settings tend to work when the chart period you are examining covers a period of no more than 2 years in length, preferably 1 year or less
- Log scale settings are best used to identify wave patterns that are similar on percentage basis
- Log scale settings tend to work best when the chart period you are examining covers a period of 1 year or more in length
Use Line Charts Instead of Candlestick Charts
Another tip that can help to identify wave patterns is to use a simple line chart instead of a candlestick chart. A line chart helps to eliminate a lot of a chart’s “noise” (otherwise known as intra-day activity) be effectively removing the candlestick’s real body.
When using a line chart, be certain that the line is calculated from the stock’s closing share price. By eliminating some of a chart’s intra-day “noise”, the Elliott Wave Pattern may become a little more clear….sometimes….
CNBC typically uses line charts when they are discussing stocks on their show. Sometimes I am amazed at the relative ease in which a wave pattern can be identified from those simple line charts.
Monitor The MACD Histogram Chart Indicator
The MACD Histogram is a very helpful indicator when trying to identify a stock’s Elliott Wave Pattern. The largest sections of the indicator that show selling momentum when viewed on weekly and monthly candlestick charts are areas where the stock’s share price went through a major correction – look to see if that makes sense with the wave pattern identified with the candlesticks. The completion of a major correction is the equivalent of completing Waves A-C.
