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Elliott Wave Trading Was Impossible, Until I Discovered These Price Action Clues (Simplified Guide) - YouTube
Channel: The Secret Mindset
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Here’s what I’ve learned after 1 full
month of studying and back testing the Elliot
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Wave Theory.
The key to using the Elliot method successfully
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lies in counting the waves correctly and identifying
the wave in which the market is currently
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trading in. That’s it. Identify the wave
and you will profit from it.
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Today, I will try to help you better understand
the general characteristics of the different
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waves within the overall market structure.
Learn this, and Elliot Wave theory will become
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much simpler.
Before we begin, if you want more videos,
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more often, please drop a like to help us
with Youtube algorithm and turn on the bell,
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so you don’t miss when new content is released.
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One of the key points within the Elliott wave
theory is the concept of the fractal nature
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of the markets. This means price patterns
repeat themselves over and over again on all
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time frames.
Under the Elliott wave theory, there are two
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types of price progressions.
The first are those price movements or waves
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that are aligned with the larger trend. These
price movements are referred to as motive
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waves.
The second are those price movements are waves
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that are contrary to the larger trend. These
price movements are referred to as corrective
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waves.
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Motive waves can be classified further as
impulse waves or diagonal waves depending
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on the form and location within the overall
structure.
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Impulse waves are the most common form of
motive waves and the easiest to spot in a
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market
A diagonal wave also moves the market in the
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direction of the trend. The difference is
that the diagonal wave looks like a wedge
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- either expanding or contracting.
Corrective waves are generally classified
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as either flat structures, zigzag structures,
triangle structures, or double or triple combinations.
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The basic form of the entire Elliott wave
sequence is comprised of five waves that make
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up the motive wave, which are labeled waves
one through five.
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Following the completion of wave five within
the motive sequence, the market will develop
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into a three wave retracement that moves contrary
to this motive wave sequence.
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This retracement move consists of three waves
labeled as waves A, B and C.
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If you’re just starting, there are only
three unbreakable rules as it relates to the
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Elliott wave principle.
The first rule is that wave two cannot retrace
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more than 100% of wave one.
The second rule is that wave four cannot move
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into the territory of wave one.
And finally, wave three cannot be the shortest
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wave amongst waves one, three, and five.
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So, like I said in the beginning of the video,
if you learn to recognize the current wave
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of the market, you will be ahead of most traders.
Now let’s me share the characteristics of
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the various waves within the Elliott wave
structure, in the context of a bull market.
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Pay attention to each description, and by
the end of the video Elliot wave theory will
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no longer appear complicated.
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Wave one begins the impulse sequence.
During this wave prices began to bounce higher
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after a long sustained downtrend.
The sentiment in the market is very bearish
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at the start of wave one.
As wave one moves higher, most people see
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this upside price movement as just a bear
market rally, and many investors and traders
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consider wave one as a good opportunity to
initiate a new short position or add to their
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existing short positions.
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Wave one is generally the least predictive
wave within the entire Elliott wave structure.
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There is really no way to know how long the
wave will last.
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However, at some point it will become clearly
apparent that wave one has ended, as a significant
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swing high is reached, and prices begin to
move lower in a bearish direction once again.
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Wave one generally subdivides into five smaller
waves and can sometimes appear as a leading
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diagonal structure.
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After wave one completes, the next one in
the sequence will be wave two.
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Wave two will move counter to wave one, and
will retrace a large portion of wave one.
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Often wave two will retrace wave one by either
a 50% retracement, 61% retracement, or even
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78% retracement.
During wave two investors and traders begin
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to feel assured once again that the downtrend
has continued. However, the market will fail
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to break below the wave one low.
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Remember, one of the unbreakable rules within
the Elliott wave theory, which is, that wave
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two cannot retrace below the start of wave
one.
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Informed traders will begin to recognize this
pattern and start to position to the long
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side of the market.
Wave two will generally take the form of a
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zigzag correction, or a flat correction.
In either case the retracement will be fairly
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deep.
Additionally, since wave two is a corrective
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structure, it will develop as an ABC pattern
comprised of three waves.
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Wave three offers the largest potential for
profit as it is usually the biggest and most
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powerful wave within the overall Elliott wave
structure.
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The psychology of traders during wave three
is generally one of growing optimism.
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Although many of the earlier sellers will
still resist the optimistic outlook during
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the early stages of wave three, it will become
increasingly evident to most traders that
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the trend has shifted, and the markets are
poised to move higher.
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After the break of the swing high of wave
one, prices will begin to accelerate upward
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as more and more traders recognize the bullish
sentiment and start taking long positions.
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Additionally, many sellers will have their
stops triggered at the wave one swing high,
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which adds further fuel to the upper price
momentum.
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If you identify the 3rd wave, you need to
join the trend as quickly as possible in order
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to take advantage of the explosive moves that
are characteristic of wave three.
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Those that wait for a pullback or retracement
to get in, will often miss the entire move,
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as wave three offers very little in the way
of pullbacks, and when they are present, they
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tend to be quite shallow.
Wave three will often travel 1.618 times the
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length of wave one measured from the end of
wave two. The second most common projection
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for wave three is for it to travel 2.618 times
the length of wave one measured from the end
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of wave two.
One of the guidelines within the Elliott wave
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principle is that among waves 1,3 and 5 of
the impulse sequence, there will be one extended
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wave which is quite larger than the other
two.
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In most cases, wave 3 will be that extended
wave.
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Wave four will follow wave three and will
retrace a portion of wave three.
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Typically, wave four will be a shallower retracement,
and will often terminate at 38% or 50% of
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wave three.
Since wave three is often the longest wave
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within the overall sequence, we can expect
wave four to be less aggressive in percentage
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terms than wave two.
Also, we need to keep in mind one of the core
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rules within the Elliott wave theory during
wave four. That is wave four should not overlap
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into the territory of wave one.
If it does, then you need to relabel your
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wave count as this is an unbreakable rule.
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Wave four is also often seen as a profit-taking
wave.
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Because those traders that bought early in
wave three are sitting on a healthy amount
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of profits, many of these traders will begin
to liquidate their positions and lock in their
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profits.
This creates a sideways price movement that
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is often prolonged in nature.
Wave four often takes the form of a triangle.
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However, wave four can also be a flat formation,
and sometimes it forms as a zigzag pattern
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or some combination.
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The price action often appears range bound,
with prices moving back and forth without
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any clear direction.
Wave four brings with it whipsawing price
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action that often generates false breakout
on either side of the market.
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You need to be very careful when taking new
positions during wave four as you are more
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likely to lose money during these directionless
market conditions.
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Wave five is the final leg within the Elliott
wave impulse sequence.
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It moves in the direction of the overall trend
similarly to waves one, and wave three.
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During the progression of wave five, almost
everyone is bullish.
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Wave five is often considered a retail wave,
because it is during this time when most retail
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investors are driving prices higher, often
to extreme valuations.
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The momentum behind the bullish activity in
wave five will be less dynamic than that during
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the wave three progression.
This basically means that the velocity of
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the price movement will be more subdued than
that seen during wave three.
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During the late stages of wave five we will
also see technical divergence patterns form
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between the price action and many momentum
indicators such as RSI, Stochastics, and MACD.
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These momentum divergence signals are telling
us is that the velocity of the price movement
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higher is diminishing, and we should expect
the upside trend to reverse its course soon.
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Along with momentum divergences, wave five
will often register lower volume compared
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to wave three. This is another indication
that the trend is weakening and that profits
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should be locked in, as a potential reversal
is imminent.
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In terms of how far wave five will travel,
well…wave five will terminate upon reaching
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a length that is equivalent to the length
seen in wave one.
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The next most likely projection for wave five
is for it to travel a distance of 61% the
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length of wave one. Both of these projections
for wave five are measured from the end of
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wave four.
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The end of wave five brings with it the completion
of the impulse sequence.
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More specifically, the impulse sequence consists
of waves one through five, and thus, at the
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end of wave five, we can expect a corrective
structure to follow which will often be a
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three wave pattern, waves A, B, and C.
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Wave A starts the corrective sequence and
during this phase, most traders are still
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very bullish, and consider the wave A pullback
as just another minor retracement.
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Wave A is somewhat similar to wave one in
its structure.
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During both of these wave progressions, the
market participants are heavily positioned
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on one side of the market, depending on the
direction of the larger trend.
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However, just as in wave one, some experienced
traders begin to recognize the overbought
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market condition during wave five.
Wave A is often a sharp move and may subdivide
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as either a five wave pattern or a three wave
pattern.
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Wave B is the second leg of the corrective
structure and follows wave A.
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Wave B is often considered a bull trap, because
it tends to draw in a lot of traders, believing
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that the existing trend is still healthy.
However, this is far from the case. Wave B
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will be a fairly short-lived pattern and will
often fail to surpass the wave five swing
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high.
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Wave B will often create a double top formation
in which it will try to test the wave five
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extreme and fail to breach it.
This doesn’t always happen; however, it
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is quite characteristic for wave B to terminate
just short of the wave five extreme.
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Wave B is often a fairly deep retracement
and will retrace wave A by either 50%, 61%,
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or 78%.
The subdivision within Wave B itself is often
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seen as a zigzag pattern, but sometimes it
will form as a triangle as well.
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One of the best trades within the Elliott
wave sequence is to fade the wave B price
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move as it nears its terminal point.
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After wave B completes, wave C will begin
and this wave marks the final leg within the
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entire corrective structure.
When the wave B swing low is breached, that
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event will mark a turning point where more
and more traders will become convinced that
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the uptrend has actually ended, and the market
is poised for lower prices.
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Wave
C is often equivalent to the length of wave
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A.
Wave C will travel a distance of 1.27 times
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the length of wave A.
After this distance, the next most likely
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area for wave C to terminate would be when
it has traveled the distance of 1.61 times
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the length the wave A.
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Now that you know the characteristics of each
wave, let me share a simple checklist to apply
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to the sequence. Print it or write it down,
and use it every time you are unsure about
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the current wave of the market.
• Wave 1, wave 3 and wave 5 are trending.
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• Wave 2 and wave 4 are corrections.
• Of wave 1, wave 3 and wave 5, wave 3 must
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not be the shortest, but it does not have
to be the longest
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• Wave 2 can retrace up to 99 percent of
wave 1.
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• Wave 4 should not go into the price area
of wave 2.
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• Wave 4 never enters the price territory
of wave 1
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• Wave 2 and wave 4 must display alternation
in as many ways as possible. That is, wave
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2 and wave 4 must be different in as many
ways as possible.
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Alternation occurs between wave 2 and wave
4 as either price, time or pattern type.
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• Price: Wave 2 when compared to wave 4
may be obviously smaller/larger in price.
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• Time: Wave 2 when compared to wave 4 may
take much more/less time.
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• Pattern: Wave 2 may be a simple ABC. Wave
4 could be a more complex A B C or even a
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triangle. Wave 2 could be a flat formation.
Wave 4 could be a zigzag or vice versa.
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If you enjoyed this type of content and want
more Elliot waves videos, leave us a like
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to show your support and to help us with Youtube
algorithm and in future videos we’ll go
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even deeper with more advanced strategies
that can be applied to day trading and swing
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trading. Until next time.
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