SWAIN SECURITIES

xxxxxx Watch Live Examples in Class

Introduction: What is Elliott Wave Theory?

In the dynamic world of financial markets, where prices are subject to the whims of supply and demand, traders and investors often turn to technical analysis to make sense of market behaviour. One of the most intriguing and widely followed approaches to technical analysis is the Elliott Wave Theory. Developed by Ralph Nelson Elliott in the early 20th century, this theory seeks to decipher market movements by identifying repetitive patterns rooted in human psychology and sentiment.

Concept of Elliott Wave Theory

Elliott Wave Theory is founded on the notion that market prices do not move randomly but instead exhibit discernible patterns that are driven by the collective behaviour of market participants. These patterns manifest as waves, with two main categories: impulsive waves and corrective waves.

Impulsive Waves

Impulsive waves form the core of Elliot Wave Theory and represent the dominant trend direction. They are composed of five smaller waves and provide the foundation for understanding market trends:

Wave 1 (Impulse): Initiates the trend in the dominant direction.

Wave 2 (Correction): Corrects a portion of the gains from Wave

Wave 3 (Strong Impulse): Typically, the most powerful and extended wave.

Wave 4 (Correction): Corrects some of the gains from Wave 3.

Wave 5 (Final Impulse): Marks the last push in the dominant trend.
Most trends unfold in Five waves in the direction of the movement and three waves or combinations of three waves in the direction counter to the primary trend.

Markets usually unfold in threes and fives.

Five wave patterns are impulsive or trend structures.

Three wave patterns are corrective or counter-trend structures.

A five-wave impulse trend and a three-wave or more complex counter-trend have a characteristic structure.

A clear objective of Elliott wave analysis is to perceive in the early stages of the wave structure whether it is more likely to be an impulse or a counter-trend.

Corrective Waves

Following impulsive waves, corrective waves aim to correct the preceding move while maintaining market equilibrium. Corrective waves consist of three waves labelled A, B, and C:

Wave A (Correction): Kicks off the correction phase.

Wave B (Rebound): Represents a rebound or retracement.

Wave C (Final Correction): Often constitutes the most substantial corrective wave.

Elliott wave follows the eight-wave cycle, which together acts as a building block larger pattern.

Elliott Wave Principle

The core principle of Elliott Wave Theory is the repetitive nature of these wave patterns across different Elliott wave timeframe and markets. By identifying and interpreting these patterns, traders and investors can anticipate potential price movements and turning points in the market.

Elliott Wave Degree

In Elliott Wave Theory, the concept of “degree” is a critical aspect used to categorize and describe the significance of waves within the larger Elliott Wave structure. Degrees help analysts and traders understand the relative importance and duration of waves, allowing for a more detailed and nuanced analysis of market price movements.

There are typically nine degrees in Elliott Wave Theory, ranging from the smallest and shortest-term price movements to the largest and longest-term trends. These degrees are labelled with both Roman numerals and numbers, and they are used to describe the hierarchical structure of waves within the theory. Here are the nine degrees, listed from smallest to largest:

Subminuette (i): This is the smallest degree and represents very short-term price fluctuations, often occurring within minutes or hours.

Minuette (ii): Slightly larger than subminuette waves, minuette waves are still relatively short-term and can be observed on intraday charts.

Minute (iii): Minute waves represent intermediate-term price movements, typically observed on hourly or daily charts.

Minor (iv): Minor waves are larger and encompass medium-term price trends. They can be observed on daily and weekly charts.

Intermediate (v): Intermediate waves represent significant price trends that may span several weeks or months and are typically visible on weekly and monthly charts.

Primary (I): Primary waves are large-scale trends that can last for years. They are often visible on monthly and yearly charts.

Cycle (II): Cycle waves represent even larger market trends that span several years or even decades. They are important for long-term investors and macroeconomic analysis.

Supercycle (III): Supercycle waves encompass very long-term trends that can span several decades. These waves are critical for understanding major economic and societal shifts.

Grand Supercycle (IV): The grand supercycle is the largest degree and represents trends that extend over centuries. It’s primarily used for historical analysis and understanding very long-term economic and social cycles.

Analysts use degree labels to identify where a particular wave fits within the larger Elliott Wave structure. For example, an analyst might identify a minor degree wave within a primary degree trend. This hierarchical approach allows for a more precise analysis of market behaviour and helps traders and investors make more informed decisions based on their preferred timeframes.
Elliott described nine degrees of waves, from the smallest, Subminuette (minutes) to Grand Supercycle (multi-century). The other six degrees of waves were added later when a further study was made. The idea is that the waves of the cycle subdivide into Primary waves, which then subdivide into intermediate waves, and so on. The waves that make up the smaller degree of trend become the building block for the pattern at the next higher wave degree.

Elliott wave time frame

The Elliott Wave Principle is established on a repeating 9-wave cycle. The cycles will exercise the time frames, including five-minute or monthly, weekly, yearly, and any actively traded market, commodity futures, stocks, indexes, and mutual funds.

Elliott Wave Analysis

Analyzing market charts using Elliott Wave Theory involves identifying and labelling waves based on their characteristics. It’s important to note that this analysis can be subjective, and interpretations may vary among analysts. Nevertheless, some key principles guide this analysis:

Elliott Wave Count: Determining where the market is within its cycle.

Wave Relationships: Understanding the proportion and relationship between waves.

Fibonacci Ratios: Using Fibonacci retracement and extension levels to identify potential reversal and target points.

Divergence and Confirmation: Employing other technical indicators to validate Elliott Wave analysis.

Elliott Wave Concepts

Impulse Trend: It normally spreads out in five waves. Five-wave impulse trends usually are made in the direction of the more significant degree trend.

Counter-Trend: It typically spreads out in three waves. A counter-trend is a correction to the prior impulse trend.

Waves of Similar Degree: This is also known as swings of a similar degree. They serve as subdivisions that form a completed structure. Waves of similar degree: This is also known as swings of a similar degree.

Subdivisions of a Wave: Any given wave may subdivide into smaller degree waves to complete the structure of the wave. For Example, Wave-1 of a five-wave impulse trend usually subdivides into five waves of a lesser degree.

We need to know how each wave of a trend or counter-trend commonly subdivides.

Also read ..Dow Theory

Elliott Multiple Time Frames

R.N.Elliott strategized to acknowledge multiple degrees of the wave structure. When the subdivisions of a wave are complete, the more significant degree wave is also complete.

Elliott Wave Chart Patterns
Elliot Theory also encompasses specific chart patterns that can provide valuable insights into market behaviour.

How Does It Look?

Elliott Wave chart patterns appear as a series of numbered waves and letters, with impulsive and corrective waves clearly defined.

The above image represents the basic Elliott wave Chart Pattern. The wave 1 to wave 5 indicate Impulsive wave and wave A to wave C indicate Corrective wave. Each wave indicates a mini- trend.

What Does Elliott Wave Cycle Indicate?

These Elliott Wave time cycles indicate the current state of the market cycle, potential trend reversals, and areas of support and resistance.

When To Use Elliott Wave Trading Strategy?

Traders use Elliott Wave strategy as part of their technical Wave analysis trading to make informed trading decisions and identify opportunities

Elliott Wave Trading Principles & Elliott Wave Trading Strategies
Elliott Wave Trader requires a deep understanding of market psychology and wave patterns. Some essential Elliott Wave principle and Wave strategy include:

Trend Alignment: Trades should align with the dominant trend direction.

Risk Management: Utilize stop-loss orders to manage potential losses.

Validation: Confirm wave counts with additional technical analysis and indicators.

Confluence: Seek confluence between different wave counts and timeframes for higher-confidence trades.

Patience and Discipline: Wait for clear setups and avoid overtrading.

Why Is Pattern Analysis An Important Part Of The Dynamic Trading Approach To Technical Analysis?
To check if a market is in a trend or counter-trend is regulated with the help of elliot wave analysis.The position of the market within a trend or counter-trend is regulated with the help of pattern analysis.The time and price objectives of the current trend or counter-trend are highlighted with the help of pattern analysis.

What Do We Analyze And Implement?

Recognition of Stocks that may follow the Elliot Wave Theory. Invest the money in those stocks when the upward trend these stocks starts. Booking of Profit as the downtrend starts in the stock. The uptrend and downtrend of these stocks are evaluated based on the stock charts, the total market capitalization of the store, and the public interest for that particular stock.Metastock/Ami Broker chart, Fibonacci, and moving averages are considered to evaluate these breakpoints with the help of the software.

Elliott Wave Examples
Let’s consider a few examples to illustrate the practical application of Elliott Wave Theory in real-world market analysis:

Example 1: Bullish Trend
In a bullish trend, an analyst might identify a clear five-wave impulsive pattern followed by a three-wave corrective pattern, indicating that the trend is likely to continue.

Example 2: Bearish Reversal
In a bearish reversal scenario, an analyst might observe a five-wave impulsive pattern followed by a three-wave corrective pattern, signalling a potential trend reversal to the downside.

Example 3: Complex Correction
Elliott Wave Theory can also identify complex corrections, where the corrective waves are more intricate, providing traders with insights into market choppiness and uncertainty.

Elliott Wave Theory is a powerful tool for traders and investors looking to gain insights into market behaviour, identify potential trend reversals, and make informed trading decisions. However, successful application of this theory requires practice, continuous learning, and a holistic approach that incorporates other forms of technical and fundamental analysis. By doing so, traders can harness the potential of Elliott Wave Theory to navigate the complexities of financial markets effectively.

Frequently Asked Questions

What is the alternation principle in Elliott Wave Theory?

The alternation principle suggests that if Wave 2 is a simple correction, Wave 4 is likely to be a more complex correction, and vice versa. This principle helps in identifying potential wave patterns.

How can I use Elliott Wave Theory in trading or investing?

Traders and investors use Elliott Wave Theory to make price predictions and identify potential entry and exit points. It’s often used in conjunction with other technical analysis tools and indicators for confirmation.

Are there any common mistakes to avoid when using Elliott Wave Theory?

One common mistake is to force-fit wave patterns onto a chart, even when they don’t fit well. Overtrading or relying solely on Elliott Wave analysis without considering other factors is another mistake to avoid.

Is Elliott Wave Theory a reliable tool for forecasting market movements?

The reliability of Elliott Wave Theory is a subject of debate among traders and analysts. Some find it to be a valuable tool for understanding market psychology and making predictions, while others consider it subjective and challenging to apply consistently.

What is the NIFTY Elliott Wave SuperCycle?

Nifty Elliott Wave supercycle essentially about applying Elliott Wave Theory to a very long-term chart of the Nifty 50 index. This analysis aims to identify and label supercycle waves (e.g., Wave I, Wave II, Wave III, Wave IV, and Wave V) and their corresponding corrective waves (A, B, C) within the Nifty 50’s historical price data.