InvestorQ : How do I actually use the Elliott Wave Theory to taking trading positions in the stock or the index?
Mahima Roy made post

How do I actually use the Elliott Wave Theory to taking trading positions in the stock or the index?

Answer
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Aditi Sharma answered.
1 year ago


The first, third, and the fifth waves are basically the impulse waves and they may have a chance of being extended beyond the originally anticipated tenure. That means; they can be longer than the other two reactionary waves. Again, this depends mostly on market psychology or sentiment. It depends on whether the undertone of the market is overall bullish or bearish. This is also, in a way, a function of valuations and the P/E ratios. Apart from that, fundamental and technical factors may also combine for a stronger push in price action. What’s particularly interesting about Elliott Waves is that you can see these impulse and corrective waves occur in longer-term time frames as well as in more granular and shorter-term time frames; such as the 1-minute chart or hourly chart or the daily chart.

According to the Elliott Theory there are roughly 21 wave patterns illustrating this phenomenon. These depend on the strength of the waves or the sharpness or shallowness of each pullback. For example, if the impulse wave lacks conviction then the reactive wave can be stronger. However, if the reactive wave is too weak then the subsequent impulse wave can be much stronger. These can be in the form of zigzag patterns, flat formations, triangle patterns etc; all of which have the same general appearance as the 5-3 wave pattern.

In conclusion, the Elliott Wave Theory can be summarized into 3 very simple rules which can be real utility when it comes to converting your Elliott Wave understanding into technical chart insights or trading positions. The first rule is that the third wave can never be the shortest impulse wave. It has to either be the first wave or the fifth wave only. The second rule is that the second wave can never go beyond the start of the first wave. That is highly unlikely and it would lead to a destruction of the entire structure. In normal market conditions, it almost never happens, which is what a reaction is all about. The third and final rule is that the fourth wave can never cross into the same area as the first wave, which again negates our Elliott approach.