Elliott waves: 5 and 3
Lesson 18 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.
Five forward, three back
In the 1930s Ralph Nelson Elliott noticed that crowds move price in similar waves. With the trend the market moves in five waves: 1, 3 and 5 push price forward, 2 and 4 are pullbacks. That’s an impulse. Against the trend comes a three-wave correction A, B and C. Together they make an eight-wave cycle. The canon is Frost and Prechter’s book Elliott Wave Principle.
The fractal: waves in waves
Each impulse wave is itself made of smaller-degree waves. Waves 1, 3 and 5 split into five small ones, and waves 2 and 4 into three. So what looks like a full impulse on the hourly may be just wave 1 on the daily. Always be clear which degree you’re talking about.
Each wave has a character
Prechter describes the waves’ “personality”, and it helps you recognise them. Wave 1 looks like an ordinary bounce; few believe in it. Wave 2 scares with its depth. Wave 3 is the most powerful, on big volume: everyone sees the trend now. Wave 4 is a dull pause. Wave 5 is euphoria and new highs, but volume and RSI are already weaker, hence the divergence.
Next: the rules
Elliott waves get criticised because you can draw them any way you like. That’s true if you don’t know the rules. Next we’ll cover the three unbreakable rules, learn to find wave 1, pick up guidelines for targets and the types of corrections. And in the trainer you’ll label an impulse yourself while it checks every rule.
Check yourself
- How many waves are in an impulse and in a correction?
Correct answer: 5 in an impulse, 3 in a correction. The 1-2-3-4-5 impulse goes with the trend, the A-B-C correction against it. Eight waves together. - Which wave is usually the strongest, with the biggest volume?
Correct answer: Wave 3. Wave 3 is when everyone sees the trend. It’s most often the longest and runs on peak volume. - On the hourly you see a finished 5 waves. What can it be on the daily?
Correct answer: Just wave 1 of a bigger impulse. Waves are fractal: five small ones make one big one. So always check the degree on the higher timeframe.