brainax

Elliott’s three rules

Lesson 19 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.

Rule 1

Wave 2 never retraces more than 100% of wave 1. Simply put, price in wave 2 can’t go below the start of wave 1. If it does, your count was wrong: that wasn’t wave 1, or not an impulse at all. This rule is a gift to traders: the start of wave 1 becomes an obvious place for the stop.

Rule 2

Wave 3 is never the shortest of the three motive waves 1, 3 and 5. It doesn’t have to be the longest, though it usually is. But if your “wave 3” is shorter than both wave 1 and wave 5, the count is wrong. Lengths are measured in price: from the start to the end of the wave.

Rule 3

Wave 4 never enters the price territory of wave 1. That is, the bottom of wave 4 stays above the top of wave 1. The only exception is a diagonal, a wedge-shaped pattern covered in the corrections lesson. In a normal impulse an overlap of 4 and 1 means the count has to be redone.

What about “wave 3 is bigger than wave 2”?

People often say wave 3 is always bigger than wave 2. That’s true, but it’s a consequence, not a separate rule. Wave 2 can’t go below the start, and wave 4 must stay above the top of wave 1, so wave 3 has to go past the top of wave 1. The actual rule is stronger: wave 3 can’t be the shortest of 1, 3 and 5. Now in the trainer you’ll label an impulse yourself and test all three rules on other people’s mistakes.

Check yourself

  1. Wave 1: from 100 to 112. “Wave 2” dropped to 98. What does it mean?
    Correct answer: The count is wrong: wave 2 went below the start of wave 1. Rule 1: wave 2 doesn’t retrace more than 100% of wave 1. Below 100 means this isn’t an impulse from 100.
  2. Waves 1, 3 and 5 measure 12, 9 and 14. Is it an impulse?
    Correct answer: No: wave 3 is the shortest. Wave 5 can be the longest, but wave 3 can’t be the shortest. 9 is less than both 12 and 14: rule 2 is broken.
  3. Wave 1 topped at 110, wave 4 fell to 108.5. Can a normal impulse do that?
    Correct answer: No: wave 4 entered wave 1’s territory. Rule 3 is strict: not even a point of overlap is allowed. The only exception is a diagonal.

← Elliott waves: 5 and 3 Where wave 1 is and where wave 5 goes →