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Elliott Wave Price Action Course | Wave Trading Explained (For Beginners) - YouTube
Channel: The Secret Mindset
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Financial markets have price movements that
repeat over and over again.
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These movements are called waves.
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Elliott Wave Theory is a comprehensive and
complex topic, taking practitioners months
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and even years to master.
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Despite its complexity, there are some elements
of Elliott Wave that can be incorporated and
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may help improve your trade timing.
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So I’ll try to keep this very simple and
I will break down the Wave Theory into small
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pieces.
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First concept: Impulsive and Corrective Waves
Ralph Nelson Elliott, the trader who developed
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the Elliott Wave Theory, proposed that trends
in financial prices resulted from investors'
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predominant psychology.
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He found that swings in mass psychology always
showed up in the same recurring fractal patterns,
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or "waves".
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Elliott discovered that stock index price
patterns were structured in the same way.
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He then began to look at how these repeating
patterns could be used as predictive indicators
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of future market moves.
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Now, prices move in impulsive and corrective
waves.
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Knowing which wave is likely underway, and
what recent waves were, will help you to forecast
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what the price is likely to do next.
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An impulse wave is a large price move and
has associated trends.
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An uptrend keeps reaching higher prices because
the moves up are larger than the moves down
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which occur between those large up waves.
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Corrective waves are the smaller waves that
occur within a trend.
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So, knowing this, it’s advised to trade
in the direction of the impulse waves, because
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the price is making the largest moves in that
direction.
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Impulse waves provide a better chance of making
a large profit than corrective waves do.
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You can use corrective waves to enter into
a trend trade, in an attempt to capture the
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next bigger impulse wave.
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The ideal way to trade is to buy during pullbacks
or corrective waves during uptrends, and ride
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the next impulse wave as it takes the price
higher.
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Also, you sell during corrective waves in
a downtrend to profit from the next impulse
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wave down.
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The idea of impulsive and corrective waves
is also used to determine when a trend is
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changing direction.
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If a price chart shows big moves to the upside,
with small corrective waves in between, and
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then a much larger down move occurs, that
is a signal the uptrend may be over.
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Since impulses occur in the trending direction,
a big move to the downside—which is bigger
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than prior corrective waves, and as large
as the upward impulse waves—indicates the
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trend is now down.
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If the trend is down, and a big up wave occurs—that
is as big as the prior down waves during the
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downtrend—then the trend is now up and you
should look to buy during the next corrective
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waves.
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Second concept: Trend and Pullback Price Structures
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Elliot found that when an uptrend is underway
it typically has three large upward price
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moves, with two corrections.
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This creates a five-wave pattern: impulse,
correction, impulse, correction, and another
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impulse.
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These five waves are labeled wave one through
wave five, respectively.
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The uptrend is then followed by three waves
lower: an impulse down, a correction to the
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upside, and then another impulse down.
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These waves are labeled A, B, and C.
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Elliot also found that these movements are
fractal, meaning the pattern occurs on small
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and large time frames.
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For example, the first impulse wave higher
within an uptrend on a daily chart is composed
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of five waves on an hourly chart.
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Also, corrective waves are composed of three
smaller waves if viewed on a smaller chart
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time frame.
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Just as impulsive and corrective waves help
determine when to enter trades, and in which
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direction the trend is moving, the price structure
can do the same.
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Assume there was a big move to the upside—an
impulsive wave—then a correction is likely
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to follow.
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That correction to the downside will often
unfold in three waves: a drop, a small rally,
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and then another drop.
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You can use this to improve trade timing by
waiting for that second drop.
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Getting it right when the price starts to
drop the first time is too early, as another
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drop is likely coming.
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Also, once there have been three big moves
to the upside, the uptrend may be nearing
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completion.
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An impulse wave to the downside would then
confirm that the price is likely to head lower
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and the uptrend is indeed over.
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Third concept is the correction size
So your trading plan should be to buy on corrections
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during an uptrend or selling on corrections
in a downtrend.
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And it is helpful to know how large the typical
correction is.
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Based on the five wave pattern, wave one is
the first impulse wave of a trend and wave
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two is the first correction.
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Wave three is the next impulse, followed by
corrective wave four and impulse wave five.
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Based on the research of Nelson, wave two
is typically 60 percent the length of wave
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one.
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If wave one advances $1, then wave two will
likely see the price drop by about 60 cents.
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Wave two is followed by impulse wave three.
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The third wave of a trend is often the largest,
usually much bigger than wave one.
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Wave four comes next and is typically 30 to
40 percent the size of wave three.
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For example, if wave three rallied $2, the
price is likely to drop 60 to 80 cents during
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wave four.
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The same concept holds true for a downtrend.
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These are averages seen over many trades and
trends.
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Corrections may be smaller or larger than
average on any single trade.
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Yet, even having an approximate idea of how
big a correction is likely to be can help
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improve you trade timing significantly.
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The 3 Golden Rules Of Elliott Wave Theory
There are THREE important rules in labeling
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waves.
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Rule Number #1: Wave 3 can NEVER be the shortest
impulse wave.
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So wave 3 should be the longest of the impulse
waves but it cannot be the shortest which
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means that waves 1 or 5 CANNOT BE longer than
wave 3.
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Also the high of wave 3 must be higher than
that of wave 1 and if it’s not higher, you
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have to start your re-count.
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You need to remember that impulse waves are
meant to be making progress not slowing down.
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Therefore if price does not exceed the high
of wave 2, then that means there’s no progress
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therefore you have to start the re-count.
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Rule Number #2: Wave 2 can NEVER go beyond
the start of Wave 1.
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In other words, Wave 2 shall not retrace more
than 100 % of wave 1.
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If a break occurs below this low, you need
to start your re-count.
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Rule Number #3: Wave 4 can NEVER cross in
the same price area as Wave 1, meaning that
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Wave 4 can never overlap wave 1.
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So the LOW OF WAVE 4 cannot go BELOW THE HIGH
OF WAVE 1.
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If that happens, you need a re-count.
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3 Elliott Wave guidelines
Now, we got 3 golden rules but we also have
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3 Elliott Wave guidelines.
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First guideline: when the wave 3 is the longer
impulse wave, wave 5 will be almost/approximately
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equal to wave 1
Second guideline: the structure for wave 2
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and wave 4 will alternate…if wave 2 is a
sharp correction, wave 4 will be a flat correction.
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If wave 2 is flat, wave 4 will be sharp.
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And the last guideline: after a 5 wave impulse
advance, ABC corrections usually end in the
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area of prior wave 4 low.
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Elliott wave trading is not that easy to understand…at
first.
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As a matter of fact, the easiest part is the
theory part.
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The hardest part is the application part!
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That’s why I advise you, at first, to utilize
the concepts I’ve talked in the beginning
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of the video: Impulsive and Corrective Waves,
trend and Pullback Price Structures and correction
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size.
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The most important thing to remember is to
only take trades in the direction of the impulse
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waves and take trades during the corrective
waves.
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Look for trade entry signals once the price
has corrected the average amount.
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The correction isn't likely to stop exactly
at the percentage levels discussed before,
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so taking trades slightly above or below the
described percentage levels is fine.
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Also, consider keeping track of each wave
in the overall price structure.
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For example, after a five wave pattern to
the upside, a bigger three wave decline usually
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follows.
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Watching the direction of the impulse waves
will signal potential trend changes, and that
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signal is stronger if combined by a five-wave
impulse pattern or three-wave correction pattern
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ending.
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These Elliott Wave concepts will improve your
analysis skills and improve your trade timing,
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but it is not without its own problems.
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As I said before, the theory can be complex
to apply, as it isn't always easy isolating
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the five wave and three wave patterns.
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Elliott Wave is not a trading technique.
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There are no specific rules of entry or exit,
nor is there one “right” way to use it
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in trading.
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As a result, the use of Elliott Wave has been
avoided by many traders, not due to a lack
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of understanding but because of the apparently
subjective nature of how it may be applied.
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Nonetheless, there are many traders who have
successfully used Elliott Wave patterns in
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their trading.
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This video was basically an introduction to
Elliot Waves and I tried not to complicate
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things, but in future videos we’ll go deeper
and we’ll talk about some advanced Elliot
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wave concepts that can be applied to day trading
and swing trading.
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As always, if you learned something new and
found value, leave us a like to show your
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Until next time.
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