🎉 Try MarketMastery Suite™ Free for 15 Days! 🎉

Elliott Wave Theory – The Basics

Developed by Ralph Nelson Elliott, this theory suggests that financial markets are not random or chaotic — instead, they move in predictable, repeating wave patterns. These patterns reflect collective investor psychology and can be analyzed using Fibonacci ratios.

At its core, Elliott Wave Theory identifies two key wave types:

Motive Waves – Move in the direction of the overall trend
Corrective Waves – Move against the trend (pullbacks or consolidations)

Markets constantly alternate between these two phases across all timeframes.

Wave analysis helps traders:

Understand market structure more deeply
Anticipate potential price moves
Identify high-probability trading opportunities based on wave progression

Motive Waves

Motive waves drive the market in the direction of the larger trend and are composed of five sub-waves. These are typically labeled as 1, 2, 3, 4, and 5.

Motive waves can be further categorized into two distinct types:

Impulse Waves
The most common type of motive wave. Follows strict rules:
- Wave 2 cannot retrace beyond the start of Wave 1
- Wave 3 is never the shortest among Waves 1, 3, and 5
- Wave 4 does not enter the territory of Wave 1
Diagonal Waves
Often occur in wave 1 or wave 5 (leading or ending diagonals).
These are wedge-shaped and may allow for some overlap between waves 1 and 4.
They typically reflect strong directional movement but with signs of internal struggle or volatility.

📐 Forecasting Waves:

Fibonacci & Channeling Techniques

Elliott proposed that price movements—called waves—are driven by shifts in investor sentiment and crowd psychology. These waves unfold in repeating patterns and can be measured and projected using Fibonacci ratios.

In practice, analysts use tools like:

Fibonacci Retracements & Extensions
To forecast likely pullbacks and price targets within wave structures
Channeling Techniques
A method of drawing parallel lines along wave formations to anticipate future wave paths based on price action

Disclaimer:
While certain rules govern wave structure (especially for impulse waves), many of the formations shown below are guidelines, not fixed rules. These reflect common tendencies seen in markets, but individual wave patterns may vary.

Impulse Waves

Impulse waves are the most common and straightforward form of motive waves. They consist of five sub-waves (labeled 1, 2, 3, 4, 5) that move in the same direction as the larger trend.

To qualify as a valid impulse wave, the structure must follow three strict rules:

Wave 2 must not retrace more than 100% of Wave 1
Wave 3 must not be the shortest among Waves 1, 3, and 5 (and is usually the strongest)
Wave 4 must not overlap the price territory of Wave 1

Impulse waves reflect strong momentum and often occur in trending environments where crowd psychology is aligned in one direction.

Diagonal Waves (Wedges)

Diagonal waves are a special form of motive wave that appear at key turning points in the market:

Leading Diagonal – Occurs at the beginning of a new trend (typically wave 1 or A)
Ending Diagonal – Forms at the end of a trend (typically wave 5 or C)

Unlike classic impulse waves, diagonals allow overlap between wave 1 and wave 4, which is normally a violation in impulsive structures.

Key characteristics:

Consist of five sub-waves moving in the direction of the main trend
Display a wedge-like shape, forming between two converging trendlines
Often signal strong directional intent but with internal struggle or reduced momentum

Corrective Waves

Corrective waves are an essential—but often more complex—part of Elliott Wave Theory. Compared to motive waves, they are less distinct, occur more frequently, and come in a wider variety of patterns. Mastering them is crucial for any serious Elliott Wave practitioner.

What Are Corrective Waves?

Corrective waves consist of three sub-waves (labeled A–B–C) or a combination of multiple three-wave sequences. These patterns move against the direction of the larger trend and serve as consolidations or retracements before the next impulse phase.

While there are many complex combinations, all corrective structures are based on three simple formations:

Zigzags – Sharp, directional corrections (5-3-5 structure)
Flats – Sideways corrections (3-3-5 structure)
Triangles – Contracting or expanding consolidations (mostly 3-3-3-3-3)

Each of these can appear individually or be combined into more complex patterns like double and triple threes.

ZigZag Corrective Wave (5–3–5)

The ZigZag is one of the most common and easily recognizable corrective patterns in Elliott Wave Theory.

It consists of three sub-waves moving against the direction of the larger trend, labeled A–B–C:

Wave A – Impulsive (5 waves)
Wave B – Corrective (3 waves)
Wave C – Impulsive (5 waves)

This creates a 5–3–5 structure, typically resulting in a sharp, directional retracement before the main trend resumes.

ZigZags often appear in:

Wave 2 corrections
Wave B of larger corrective patterns
Complex combinations as part of a larger structure

Flat Corrective Wave (3–3–5)

A Flat is another common corrective pattern in Elliott Wave Theory, consisting of three sub-waves labeled A–B–C, moving against the trend of a larger wave.

Unlike a ZigZag, a Flat has a 3–3–5 internal structure:

Wave A – Corrective (3 waves)
Wave B – Corrective (3 waves)
Wave C – Impulsive (5 waves)

The key distinction from a ZigZag lies in the subdivision of Wave A, which is corrective rather than impulsive.

Types of Flat Patterns:

Regular Flat – Wave B retraces near 100% of Wave A, Wave C ends slightly beyond A
Expanded Flat – Wave B exceeds the start of Wave A, Wave C moves sharply beyond Wave A
Running Flat – Wave B exceeds the start of Wave A, but Wave C fails to move past Wave A

Flats typically occur in:

Wave 4 positions
Wave B of larger corrections
Sideways market environments

Triangle Corrective Wave (3–3–3–3–3)

Triangles are consolidation patterns that unfold in five sub-waves labeled A–B–C–D–E, moving sideways against the larger trend. Each leg of the triangle is composed of three sub-waves, forming a 3–3–3–3–3 structure.

These patterns are typically bounded by converging or diverging trendlines, reflecting market indecision before a breakout or continuation.

Common Triangle Types:

Symmetrical Triangle – Converging trendlines; balance between buyers and sellers
Ascending Triangle – Flat top with rising support; typically bullish
Descending Triangle – Flat base with falling resistance; typically bearish
Expanding Triangle – Diverging boundaries; increasing volatility and uncertainty

Triangles usually appear:

In Wave 4 of an impulse wave
In Wave B of an A–B–C correction
As part of complex corrective combinations

They often signal that a strong move is coming next once the consolidation completes.

Complex Corrective Waves: Double Three & Triple Three

When simple corrective patterns (like ZigZags, Flats, or Triangles) are not sufficient to correct a price move, the market may form complex combinations—sideways structures made up of multiple corrections.

▶️ Double Three (W–X–Y)

A combination of two corrective patterns
Labeled W, X, Y
Common structures include Flat + ZigZag, or ZigZag + Triangle
Each component wave (W and Y) is itself a 3-wave correction, making the overall structure 3–3–3

▶️ Triple Three (W–X–Y–X–Z)

A combination of three corrective patterns
Labeled W, X, Y, X, Z
Often appears in prolonged sideways consolidations
Structure follows 3–3–3–3–3 internal waves

These complex corrections:

Tend to move sideways rather than sharply against the trend
Reflect prolonged indecision or a slow drift in the market
Commonly occur in Wave 4 or Wave B of larger wave degrees

WXY Structure – Double Three Correction (7-Swing Pattern)

WXY is a complex corrective formation, commonly referred to as a Double Three or Double Correction. It’s used when a single ZigZag or Flat is not sufficient to correct a market move.

Structure Breakdown:

Composed of three main waves: W, X, Y
Each wave (W and Y) is itself a corrective pattern (e.g., ZigZag, Flat, or even another combination)
The X wave acts as a connector between W and Y, typically a ZigZag or Flat

Although WXY follows a 3–3–3 internal structure, it is often described as a 7-swing pattern:

W and Y each contain 3 swings
X is counted as a single swing
Total: 7 price swings

📌 Note: Wave W cannot be a triangle, but wave Y can in some cases.

This structure allows for greater flexibility and variation in market corrections, often appearing in sideways, range-bound environments or during prolonged consolidation phases.

WXYXZ Structure – Triple Three Correction (11-Swing Pattern)

WXYXZ is an advanced complex corrective pattern, also known as a:

Triple Three
Triple Correction
11-Swing Structure

This formation combines three separate corrective patterns, making it one of the most intricate forms of correction in Elliott Wave Theory.

Structure Breakdown:

Composed of: W – X – Y – X – Z
W, Y, and Z are each corrective structures (e.g., ZigZag, Flat, or Triangle)
X waves act as connectors binding the sequences together

Just like the Double Three, this pattern follows the 3–3–3–3–3 internal format but is often referred to as an 11-swing structure:

Each of W, Y, and Z contain 3 swings
Each X wave is counted as 1 swing
Total: 11 price swings

📌 Same rules apply as in WXY:

Wave W cannot be a triangle
X waves are usually simple (e.g., ZigZag or Flat)
Offers more flexibility to extend complex sideways corrections

ABC vs. WXY Corrective Waves – Key Differences

Both ABC and WXY are corrective patterns made up of three waves (swings), which often leads to confusion when labeling charts. However, the main difference lies in their internal wave structure.

ABC Corrections (Simple Corrections)

ABC corrections typically appear as:

ZigZag → Internal structure: 5–3–5
Flat (Regular, Running, or Expanded) → Internal structure: 3–3–5

These patterns consist of:

Wave A: Either 5 or 3 sub-waves (depending on the pattern)
Wave B: Always 3 sub-waves
Wave C: Always 5 sub-waves

WXY Corrections (Complex / Combination)

A WXY pattern is a combination of two separate corrective structures (such as ZigZags, Flats, or Triangles), connected by an X-wave.
Internal structure: 3–3–3
- Wave W: 3 sub-waves (corrective)
- Wave X: 3 sub-waves (connector)
- Wave Y: 3 sub-waves (corrective)

📌 Tip:

If the legs are all corrective and the structure looks more sideways than impulsive, it’s likely a WXY, not an ABC.

Page updated

Google Sites

Report abuse