Where wave 1 is and where wave 5 goes
Lesson 20 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.
How to find wave 1
Wave 1 starts where the previous move ended: from the lowest low after the fall. At first it looks like an ordinary bounce. The signs: the push broke the series of lower highs, and wave 2 pulled back without going below the start. The count is finally confirmed when price goes above the top of wave 1: that’s wave 3.
Guidelines for wave lengths
Besides the three rules, Elliott has guidelines. They can be broken, but they often come true. Wave 2 often retraces 50–61.8% of wave 1. Wave 3 is often 1.618 times wave 1. Wave 4 is often about 38.2% of wave 3 and unlike wave 2: if wave 2 was sharp, wave 4 is usually sideways. That’s called alternation. If wave 3 is strongly extended, wave 5 often equals wave 1.
The channel hints at the end of wave 5
Frost and Prechter advise drawing a channel. Draw a line through the ends of waves 2 and 4, and a parallel through the top of wave 3. Wave 5 often ends near the upper line. If volume is also falling and RSI shows a divergence, that’s a strong hint the impulse is finishing.
Waves in a trade
The most popular Elliott trade is entering at the start of wave 3, as wave 2 ends. The pullback reached 50–61.8%, and there’s a signal candle. The stop goes under the start of wave 1: if price gets there, rule 1 says the count is wrong. The target is 1.618 of wave 1’s length. That gives a small stop and a big target. That’s exactly why traders love waves.
Check yourself
- Where does the count of wave 1 begin?
Correct answer: From the lowest low, where the previous fall ended. An upward impulse starts where the downward move ended. That’s the extreme: the lowest low. - Wave 1 is 10 points long, wave 2 ended at 104. Where’s a common wave 3 target?
Correct answer: About 120: 104 + 1.618 × 10. A common wave 3 target is 1.618 of wave 1 from the end of wave 2: 104 + 16.2 ≈ 120. It’s a guideline, not a rule. - Wave 2 was sharp and deep. What will wave 4 most likely be like?
Correct answer: Sideways and shallow: alternation. The alternation guideline: waves 2 and 4 usually differ in shape. If wave 2 was sharp, wave 4 is more often sideways.