BASIC THEORIES

Elliott Wave Theory posits markets move in repetitive 5-3 wave cycles: 5 impulse waves (with trend, faster execution) followed by 3 corrective waves (against trend, slower development). Wave 3 is typically the fastest/strongest impulse due to maximum participation, while corrective ABC waves (especially flats/triangles) progress slowest with choppy consolidation. Beginners focus on basic 5-3 structure, 3 cardinal rules, and Fib relationships for practical counting. 

Core Concepts

Impulse waves (1-2-3-4-5) subdivide into 5 waves each, advancing the trend; correctives (A-B-C) into 3 waves, counter-trend. Fractal nature applies across timeframes; degrees label larger cycles (e.g., Wave I vs. i). Key Fib ties: Wave 2 retraces 50-61.8% of 1, Wave 3 = 161.8-261.8% of 1, Wave 4 = 38.2% of 3.

3 Cardinal Rules

• Rule 1: Wave 2 never retraces >100% of Wave 1.​

• Rule 2: Wave 3 cannot be shortest impulse (often longest).​

• Rule 3: Wave 4 never enters Wave 1 price territory.

Beginner Structure

Start with impulse: Wave 1 (initial move), 2 (retracement), 3 (extension), 4 (sideways pullback), 5 (final push). Follows ABC correction: A (sharp drop), B (rally <A), C (=A length). Trade Wave 3 entries (fastest) on pullbacks to 38.2-50% Fib.​

Impulse Waves Detail

• Wave 1: Small, motive start.​

• Wave 2: Sharp retrace (never to Wave 1 origin).​

• Wave 3: Fastest, longest, no overlap with 1.​

• Wave 4: Shallow, complex (alternation from 2).​

• Wave 5: Equal to 1 or truncated.​

Corrective Patterns

• Zigzag (5-3-5): Sharp ABC.​

• Flat (3-3-5): Sideways, Wave B near A start.​

• Triangle: Converging ABCDE, slow consolidation.​​

Impulse waves (1-2-3-4-5) subdivide into 5 waves each, 

Advancing the trend; correctives (A-B-C) into 3 waves, counter-trend. 

Fractal nature applies across timeframes; 

degrees label larger cycles (e.g., Wave I vs. i). 

Key Fib ties: 

Wave 2 retraces 50-61.8% of 1, 

Wave 3 = 161.8-261.8% of 1, 

Wave 4 = 38.2% of 3.​​

3 Cardinal Rules

• Rule 1: Wave 2 never retraces >100% of Wave 1.​

• Rule 2: Wave 3 cannot be shortest impulse (often longest).​

• Rule 3: Wave 4 never enters Wave 1 price territory

Beginner Structure

Start with impulse: Wave 1 (initial move), 2 (retracement), 3 (extension), 4 (sideways pullback), 5 (final push). Follows ABC correction: A (sharp drop), B (rally <A), C (=A length). Trade Wave 3 entries (fastest) on pullbacks to 38.2-50% Fib.

Impulse Waves Detail

• Wave 1: Small, motive start.​

• Wave 2: Sharp retrace (never to Wave 1 origin).​

• Wave 3: Fastest, longest, no overlap with 1.​

• Wave 4: Shallow, complex (alternation from 2).​

• Wave 5: Equal to 1 or truncated.

Corrective Patterns

• Zigzag (5-3-5): Sharp ABC.​

• Flat (3-3-5): Sideways, Wave B near A start.​

• Triangle: Converging ABCDE, slow consolidation.

Position sizing ensures fixed risk per trade (typically 1-2% of account) regardless of RR ratio, using the formula: Position Size = (Account Balance × Risk %) ÷ Risk per Share (Entry - Stop Loss). RR influences target but not size—higher RR (e.g., 1:3) justifies the risk without altering shares/lots. For channel entries, measure risk from entry to stop below/above retest.​

Core Formula

Calculate risk amount first: Account × 0.01 (for 1% risk). Divide by per-shareare risk: |Entry Price - Stop Price|.​ Example: $10,000 account, 1% risk ($100), entry $50, stop $48 (risk $2/share) → 50 shares ($100 ÷ $2).​

Channel Entry Example

In descending channel retest long: Entry at retest support ($48), stop below low ($46, risk $2), 1% on ₹5L account (₹5,000 risk) → 2,500 shares. Target at 1:3 RR ($54) yields ₹15,000 profit if hit.​

Steps to Size

•Define risk % (0.5-2%, conservative for India markets).​

•Mark entry/stop from structure (retest low/high).​

•Compute: Shares = Risk ₹ ÷ |Entry - Stop|.​

•Adjust for lot size in F&O (e.g., Nifty).​

RR Integration

Size based on risk only; select setups where Reward (Target - Entry) ≥ 2× Risk for sustainability. Track via spreadsheet: larger RR allows win rate <50% profitability.​