The Elliott wave model is one of the effective tools for market analysis. Therefore, understanding How to identify Elliott waves is especially important for traders to effectively apply the wave principle to trading. Below, Crypto Trading will help you understand this issue clearly.
What is the Elliott Wave? What is it used for?
The Elliott Wave Theory is named after its inventor – Mr. Ralph Nelson Elliott (July 28, 1871 – January 15, 1948). He was an accountant and also a great author in the US. After more than 75 years of researching the financial market, he realized that although at first glance the market seemed to fluctuate randomly. But in fact, it was cyclical and repetitive. And that was the foundation for the Elliott Wave Principle.
What is the Elliott Wave? It is a wave chart that shows the price going up and down according to the psychology of the crowd, according to the market news. Elliott’s theory believes that prices will move in cycles that are repetitive. In each cycle, it can be divided into sub-waves (within a wave there are waves). Its purpose is for investors to be able to predict the future direction of prices.
Elliott waves are divided into many different levels. They can be small waves in the 30-second or 1-minute time frame. They can also be large waves that last for hundreds of years.
In other words, the Elliott wave model is a graph that shows the different emotional states of traders before market fluctuations.
Elliott Wave Principle: Understand correctly to have the correct way to recognize Elliott waves
The Elliott Wave Principle was first published in 1938. Although there have been many additions to it, the core of the principle remains the same. Accordingly, each Elliott model is divided into 5 waves. In which:
- Wave 1, 3, 5: Trend Wave
- Wave 2, 4: Corrective wave.
Thus, trend waves and corrective waves (also known as bullish waves and bearish waves) will be intertwined with each other and they have immutable principles:
- Wave 4 must never enter the price zone of wave 1.
- Wave 3 cannot be the shortest wave and it is the strongest bullish wave of the 3 bullish waves 1,3,5.
- Wave 2 cannot be corrected beyond the starting price zone of wave 1.
These are also the things you need to know in the wave counting rules. How to identify Elliott waves will depend on these rules. Thanks to that, you will determine the correct phase, correct wave, and correct sequence of 5 waves on the price chart.
See more: Elliott wave: learn principles, trade effectively
How to identify Elliott waves with 2 basic models
A complete and basic Elliott wave indicator will consist of 8 waves. It will be divided into 2 phases. The first phase consists of 5 waves with the rules we have mentioned above. The second phase will consist of 3 waves and these are 3 corrective waves (against the main trend). These 3 waves will not be numbered 1,2,3 but will be marked with letters A, B, C.
The wave phase consisting of 5 waves is called the motive model. The corrective wave phase consisting of 3 waves is called the corrective model. In each model, we will have a specific way to recognize Elliott waves:
How to recognize Elliott wave motive wave pattern
The momentum model consists of 5 small waves with 3 waves moving in the same direction as the trend and 2 waves correcting against it. The way to recognize Elliott waves in this model is that the wave phase satisfies the following conditions:
- Wave 2 does not correct beyond the starting point of wave 1 (If in an uptrend, the next bottom will always be higher than the previous bottom. If in a downtrend, the next top will always be lower than the previous top)
- Wave 3 is not the shortest wave (compared with waves 1,3,5)
- Wave 4 must never enter the price zone of wave 1.
How to identify Elliott waves corrective wave pattern
With the corrective wave phase, the basic model will consist of 3 waves. Or it can be 4 or 5 waves but not exceeding 5. This model has a smaller structure than the motive wave phase (short formation time, not as large). In these 3 corrective waves, there will be 2 waves moving against the main trend. The remaining wave moves in the same direction as the main trend, regardless of order.
How to identify Elliott waves nâng cao
In fact, the Elliott wave model is much more complicated. Because in each small wave, there will be smaller waves. The shape of the waves is also different. Therefore, if we synthesize the models from the smallest, we will have a very large volume.
Here, we just need to pay attention to How to identify advanced Elliott waves in a few popular models:
Advanced Elliott Wave Patterns in Motivational Form
- Extended Elliott pattern: When wave 3 is the largest, wave 3 is likely to expand into 5 smaller waves. At that time, waves 1 and 5 will tend to be balanced. If wave 3 expands once, the total Elliott momentum pattern will consist of 9 waves (4 waves 1,2,4,5 and 5 waves extended from wave 3). If it expands twice, it will be 13 waves and if it expands three times, the total number of waves will be 17.
- Diagonal Triangle Elliott Wave Pattern: This pattern is formed when the Elliott wave motive satisfies the condition that waves 1,3,5 are all Zigzag, wave 3 is not the shortest wave, and waves 2,4 do not have any specific adjustment. At that time, connecting the peaks and troughs of the wave, we will have a triangle pattern converging at wave 5.
- Failed wave 5 pattern (truncated wave 5): This pattern appears when the motive wave with wave 5 does not exceed wave 3 or exceeds it insignificantly. The other waves still follow the basic Elliott wave principle.
How to identify advanced corrective Elliott waves
- Elliott Zigzag wave pattern: This pattern is formed under the following conditions: Wave B has a length of no more than 61.8% of wave A. Wave C must exceed the end of wave A. At the same time, the length of A and C is usually equal and greater than the length of B. Then, connecting the peaks and troughs of the waves, we will get 2 trend lines following the Zigzag line.
- Flat wave pattern: The structure is similar to Zigzag. But the 2 trend lines drawn will be 2 parallel horizontal lines instead of moving Zigzag up and down.
See more: MEXC: Open a MEXC account, invest effectively
Effective trading with Elliott wave patterns
By mastering How to identify Elliott waves, new investors can trade effectively with this technical indicator. The standard trading method will follow the 3-step process below:
- Master the way to count waves, and accurately identify Elliott waves on trading charts.
- Market analysis, looking at the overall chart, should consider the chart in long time frames to grasp the main trend. Traders can also combine Fibonacci and Elliott waves or combine some other indicators to determine the trend more accurately.
- Wave 3 is considered a potential Buy entry point. However, it is best for traders to wait for confirmation of the reversal signal before making a decision. This can help limit unnecessary risks if the price moves beyond expectations.
Conclude
How to identify Elliott waves seems simple at first glance but is extremely complex. Therefore, to master trading with this indicator, traders need to practice persistently and learn how to recognize waves regularly. In addition, you should also read other in-depth technical analysis content from Crypto Trading to learn more about many market analysis tools. Wish you successful and profitable trading with Elliott Waves.
FAQs
Which indicators should traders combine Elliott waves with?
Fibonacci series, MA lines, MACD lines, and RSI indicators are considered good tools to combine with Elliott.
What is the ideal entry point when trading with Elliott Waves?
That is the price position at wave 3, signaling the market is about to reverse in the short term.
What do investors usually use Elliott waves for?
The Elliott model is often used to identify short-term market trends and trade these opportunities.
