Three Elliot Wave Rules to Comply with
In principle, the formation of Elliot Wave is caused by the movement of market prices in repetitive wave patterns. Elliott wave patterns alternate between the five waves, the so-called motive phases, and three waves of counter-trend movement called the corrective phase. The five waves in the motive phase are labeled with numbers 1, 2, 3, 4, and 5. Motive waves can be impulse waves. While three corrective phase waves are labeled letters A, B, and C.
Elliott Wave Theory has only three simple rules that apply to impulse waves and should not be broken:
Wave 2 may not be a correction exceeding wave 1, no matter whether it is an impulse wave or a diagonal triangle. If wave 2 moves beyond the start of wave 1 then assumed as wave 1 and wave 2 is still part of corrective phase.
Wave 3 DOES NOT NEED to be the longest but the shortest wave of three motive waves, ie waves 1, 3 and 5. Wave 3 is usually, but not always, the wave with the strongest and longest movement. But wave 3 can not be the shortest.
Wave 4 may not penetrate the price region of wave 1, unless it is part of the diagonal triangle. In markets with leverage, such as futures and forex markets, wave 4 may not approach the end of the market wave with leverage likely to have a volatility moment that creates a spike between high or low candle prices and actual closures. These short spikes often have little technical value.
If any of the above rules fail, this indicates that there are errors in wave counting and the number of waves so it needs to be reviewed.
In addition to this rule there are some typical guides from Elliott Wave but not always the case. That’s why it’s called a guide and not a rule. This guide covers extensions, deductions, changes, distribution, and equations.
Detecting Elliot Wave is not easy for the unfamiliar. So if you want to use this theory, you must practice it continuously to advanced.