Elliott Waves: A Powerful Tool For Technical Analysis (Part 2) !
So last time I explained the Elliott Wave theory when we are in an uptrend. Today we are going to see how Elliott waves can help us predict the bottom of a retracement phase.
Waves Characteristics
First of all, it’s important to know that each wave can be divided into multiple waves, so it’s important to know exactly where we are :
Each impulsive wave (1, 3, 5) is divided into 5 waves. Moreover, each correction wave (2, 4) is divided into 3 smaller waves (ABC) :
There are multiple figures for a correction wave like the “flat” (illusatration above) and the “Zigzag” (illustration below).
When we are in a bearish trend, there are 2 impulsive waves (A and C) and one correction wave (B).
The main difference is that the flat correction makes 2 equal lows and the zigzag makes a lower low in its final impulsive wave.
So if you can identify in which configuration we are in while we are in a correction phase, you will know when to enter or exit the market.
For example, if you are in a zigzag, you will wait for the C wave to happen and then buy.
But can we identify in which configuration we are in? Yes!
A Zigzag is divided into 5 waves (A) followed by 3 waves of correction (B) and 5 last waves of correction (C) (5,3,5).
The length of each wave can be predicted by Fibonacci retracement levels :
- Wave B = 0.5, 0.618, 0.764, or 0.854 of the first wave.
- Wave C = 0.618, 1, or 1.236 of the first wave.
On the other hand, a flat is divided into a first wave of impulse of 3 waves (A). Followed by a correction wave of 3 waves as well (B), and for last, there is an impulsive wave divided into 5 smaller waves (C) (3,3,5).
We can also predict how far each wave can go, those are the main levels of Fibonacci :
- Wave B = 0.90 of the first wave
- Wave C = 0.618, 1, or 0.126 of the second wave (B)
So if you can identify the division of the second wave, you can determine if we are in a zigzag or in a flat and thus adjust your strategy of investment or trading.
There are multiple other variations for a correction. However, those can be more complex and might mislead us. I may do another article on them.
Conclusion
The Elliott wave is very useful if used correctly. However, it’s important to note that like every strategy, it’s not a 100% guarantee of success.
So it’s important to pair it with other indicators and price action analysis to back our predictions.
And what is your strategy when analyzing? Feel free to ask any questions in the comments !
As always thank you for reading !
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Disclaimer : This is not a financial advice, you need to do your own research !
