In the 1930s, Ralph Nelson Elliott noticed markets often move in a repeating rhythm: five waves with the trend, then three waves against it.
The impulse (1–5)
- Waves 1, 3, 5 move with the trend.
- Waves 2 and 4 are pullbacks.
- Wave 3 is often the longest and strongest.
The correction (A–B–C)
After five waves, the market corrects in three: A down, B up, C down.
The three unbreakable 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 doesn't enter wave 1's price territory.
Wick says
Elliott Wave is part science, part art. Ask three Elliotticians to count the same chart and you might get four answers.
Pro tip
Practical use: wave 3 is the money wave. Many traders look to buy the end of wave 2, often at a 50–61.8% Fibonacci retracement of wave 1.
Key takeaways
- Five waves with the trend, three against it.
- Wave 3 is usually the strongest.
- Three rules invalidate a wrong count.