What Is Elliott Wave Theory?
💡 Definition
Elliott Wave Theory (EWT) is a form of technical analysis that interprets market price movements as repeating waves driven by collective investor psychology. Prices move in five-wave impulses (in trend direction) and three-wave corrections (against trend).
The theory, developed by Ralph Nelson Elliott in the 1930s, suggests that these fractal wave patterns occur on every timeframe, reflecting cycles of optimism and pessimism.
Visual Overview
The Classic 5-Wave Impulse and 3-Wave Correction
Impulse waves (1–5) move with the main trend; corrective waves (A–B–C) retrace part of that move. The pattern repeats fractally across timeframes.
Wave Structure Overview
🏗️ Impulse Wave (1–5)
Five-wave pattern following the trend: Waves 1, 3, and 5 are impulses; Waves 2 and 4 are corrective pullbacks.
🔁 Corrective Wave (A–B–C)
Three-wave pattern counter to the main trend, typically forming zigzags, flats, or triangles.
🧬 Fractals
Each wave subdivides into smaller waves (five inside impulses, three inside corrections).
📈 Degree
Waves exist on multiple timeframes: Grand Supercycle → Subminuette, all nested in structure.
Impulse Wave Rules (Must Hold)
Practical Guidelines
- Wave 3: Often the longest and most powerful, driven by volume expansion.
- Wave 5: Tends to show divergence in momentum indicators.
- Corrections: Common retracements are 38.2%, 50%, or 61.8% of the impulse move.
- Fibonacci Alignment: Wave relationships frequently adhere to Fibonacci ratios.
Common Corrective Patterns
↕️ Zigzag (5–3–5)
Sharp correction with Wave A and C as impulses; Wave B retraces shallowly.
〰️ Flat (3–3–5)
Sideways correction; Wave B retraces near 100% of Wave A; C often overshoots.
🔺 Triangle (3–3–3–3–3)
Contracting consolidation before final thrust (usually Wave 4 or B).
🌀 Complex Combination
Two or more simple corrections linked by an “X” wave; increases time but not distance.
How to Apply Elliott Waves
Process
1) Identify the larger trend (impulse or correction) on higher timeframe.
2) Label waves provisionally and validate using structure and volume.
3) Align Fibonacci retracements/extensions with expected wave targets.
4) Confirm via momentum/volume divergence (e.g., Wave 5 vs 3).
5) Trade with trend in impulsive phases; hedge or fade cautiously in corrective phases.
Common Mistakes
⚠️ Avoid These Errors
- Forcing wave counts on random price swings.
- Ignoring invalidation rules (e.g., Wave 4 overlap).
- Using EWT alone without volume, momentum, or structure confluence.
- Labeling every retracement as a new wave degree.
- Expecting perfect symmetry — real markets are messy fractals.
Advanced Concepts
📊 Fibonacci Targets
Wave 3 ≈ 1.618 × Wave 1; Wave 5 ≈ 0.618 × (1–3); Wave C ≈ A × 1.0 or 1.618.
🧩 Fractal Alignment
Each impulse embeds smaller impulses; count must be consistent across degrees.
📈 Diagonals
Leading/ending diagonals where waves overlap but channel cleanly; occur in 1 or 5.
🔗 Elliott + Volume Profile
Wave 3 volume spike at breakout HVN; Wave 4 base forms at POC before final push.
The Bottom Line
Elliott Wave Theory is a map of market psychology — impulses reflect expansion of optimism, corrections the contraction of confidence. Use it as a structural framework, not a rigid forecast. Combine with volume, Fibonacci, and risk control to trade waves, not guesses.