Basically, the Wave Principle says that markets follow a pattern that keeps repeating. According to Elliott, markets up/down in advances of 5 wave and continue with corrections of rest in 3 waves.
Consequently, whether the main movement is upward as if bearish, the market forms a complete cycle of eight waves 1, 2, 3, 4, 5 and a, b, c.
The essence of the principle is that the movements in the direction of the main trend have a 5 wave structure, while the movements against the main trend are structures of 3 waves, which allows determining the underlying trend.
A) With respect to the 5 waves 1, 2, 3, 4 and 5, one must distinguish the character of waves 1, 3 and 5 on one side, and the waves 2 and 4:
a.1) Waves 1, 3 and 5 are called “impulse waves,” because they are movements in the direction of the main trend, be it bullish or bearish. Each of these waves are divided into other 5 waves of lower grade, ie, the waveform 1 is formed of 5 waves 1, 2, 3, 4 and 5, the wave 3 is composed of 5 waves 1, 2, 3, 4 and 5, and also the wave 5 is developed in 5 waves 1, 2, 3, 4 and 5; though the form in which they evolve the prices does not allow to differentiate always these 5 movements in each of the ” impulsive waves ” (1, 3, 5).
a.2) Waves 2 and 4, called “corrective waves” are movements against the main trend, and are generally subdivided into three lesser extent waves, so that the wave 2 evolves in 3 waves a, b, c, and the wave 4 in the 3 waves corresponding a, b, c. As in the “impulse waves”, only in some occasions it is possible to differentiate these 3 movements in each of the “corrective waves” (2, 4).
B) With regard to the 3 waves a, b, c, it is necessary to distinguish equally the function of the waves to and c of the wave b:
As mentioned above, the sequence 1, 2, 3, 4, 5 is corrected later by the sequence a, b, c, thus completing a full cycle of eight waves. The movement of this corrective sequence a, b, c, is bearish if the sequence 1, 2, 3, 4, 5 was bullish, or bullish if the above sequence was bearish.
b.1) The waves a and c are waves of impulse of this corrective sequence, Since they are those who stimulate the correction. Accordingly, each of them should comprise 5 waves of lower grade1, 2, 3, 4, 5, differentiated or not as appropriate.
b.2) Wave b, called “corrective wave”, it moves in opposite direction of the correction and thus can be developed in three waves of lesser grade, a, b, c.
This possible subdivision of each impulse wave or corrective waves of lesser magnitude is, precisely, the most important discovery of Elliott, since it implies that the guidelines in that develop the market take place in all the degrees of the trend.
1º The Elliott Wave Principle NOT applies side trends.
2º With trend ALWAYS are formed cycles of waves and subwaves.
3º Inasmuch as waves or subwaves follow the same sequence, ie 1, 2, 3, 4, 5 we should have no problem locating, at any time, cycles of 8 waves, according to the Wave Elliott Principle we use in our daily operational trading.
The analysis of each wave, in a change trend bullish to bearish, is as follows:
Impulsive Wave 1:
Usually it is the shortest of all the impulsive ones
Corrective wave 2:
Usually it tends to reverse much of the travel of impulsive wave 1.
Precisely it will be the capacity of the corrective wave 2 of is over the soil of the impulsive wave 1, the one that is in the habit of producing double and triple soils and the lines of the neck of the figures chartists of shoulder – head – shoulder.
Impulsive Wave 3:
This is usually the longest of all impulsive, and should never be shorter than any of the other remaining 5 waves.
Corrective Wave 4:
This is where you tend to form triangles. The floor of this wave should not touch NEVER the ceiling of impulsive wave 1.
Impulsive Wave 5:
Usually less active than the impulsive wave 3. At this stage many oscillators begin to show serious divergences.
Corrective Wave a:
Is where start the corrective phase of the whole movement.
Impulsive Wave b:
It is a correction of bullish wave a. Not it usually occurs with lots of volume.
Corrective Wave c:
It descends far below from the soil of the wave a, producing many bearish signals.
The analysis of each wave, in a change trend bearish to bullish, is as follows:
The detail of every wave is equal to the indicated one for the bullish trend.
When do we start counting a wave?
Elliott’s law says that a reversal than 61.8% of the previous wave should NOT be taken as a setback in the same, but a new wave similar to the first, so that the wave count will start from the second wave, NO from the first.