ELLIOT WAVE RULES AND GUIDELINES

ELLIOT WAVE RULES AND GUIDELINES

What is the difference between Elliot wave rules and Elliot wave guidelines? The rules are set of conditions that you must apply in order to count the waves correctly, Elliot wave rules were founded by the legend himself Ralph Nelson Elliot when he analyzed a set of stock charts and he discovered that the market moves in certain patterns and they follow certain rules. The Elliot wave rules cannot be broken or changed, once you change them you no longer trading Elliot wave principle. While on the other side the guidelines are just observation of the markets which cannot be guaranteed and can change any time. Guidelines are from experience of the current market but they don’t hold for all market conditions like rules. In the free course, I explained the 3 Elliot wave rules but I want to go through them again because they are very important with regards to Elliot wave. As I said once you break the rules you are no longer trading the Elliot wave. Below are the most important rules, and some images to go with them.

RULE ONE: WAVE TWO CANNOT GO BELOW START OF WAVE 1, BUT IT CAN GO 100% OF WAVE 1

elliot wave rule number 1
Elliot wave gave us rules, this is rule number 1

 

Looking at the image above we can see the correct way and the incorrect way of counting from wave 1 to wave 2. As the rule states that wave 2 must not go below start of wave 1, in the image above the left-hand side counting is correct since that rule is met, while the right-hand side we can see that wave 2 exceed start of wave 1. In any counting that you do while trading Elliot wave when the price reaches the invalidation point (I.P), we must double check our counting, 9 out of 10 times our counting is wrong we made mistake somewhere.

RULE 2: WAVE 3 CANNOT BE THE SMALLEST WAVE BETWEEN WAVE 1, 3 AND 5

elliot wave rule number 2
Elliot gave us rules, this is rule number 2 about wave 3

 

In the image above you can see that the incorrect counting labeled in red is wrong because of wave 3 is shorter than wave 1 and wave 5. Never mind that the wave 4 has another rule which is broken. This rule is usually mistaken in an extended wave 3. So above I showed you the correct counting in an extended wave 3 where you might make this mistake. Elliot wave rules are simple to understand but you need practice to get them right all the time. no lets continue and look at elliot wave rule number 3.

RULE 3: WAVE 4 MUST NOT COME TO PRICE AREA OF WAVE 1

elliot wave rule number 3
Eliot wave rule number 3

 

This Elliot wave rule is depended on the type of motive wave. In an impulsive wave, wave 4 is not supposed to go to price area of wave 1 or wave 2. While in a diagonal wave pattern this rule has an exception as I explained in the course. Remember that diagonals are rare in the markets. So you must always ensure that your wave 4 does not break the rules if it does most of the time you are in a corrective wave what you counted as 1, 2, 3 is actually  A, B, C. The correct counting in an impulsive wave is that wave 4 must finish before end of wave 1 or beginning of wave 2.

We have seen the rules now let see the Elliot wave GUIDELINES.

elliot wave rules and guidelines
Elliot wave guidelines

 

GUIDELINE 1: using the diagram above let us look at guideline 1, if wave 3 is the longest, usually wave 1 and wave 5 are more or less the equal to each other in terms of price and time. This means if wave 3 is an extended wave that means to predict wave 5 we can measure wave 1 to get a good idea where it will end, roughly. In the diagram wave 3 is extended, wave 1 and wave 5 are almost equal.

GUIDELINE 2: the law of alternation states that if wave 2 is simple correction pattern like zig-zag, and it goes fast. Then wave 4 will be complex and move sideways. It also works vice versa, if wave 2 is complex moving sideways then wave 4 will be simple and move very fast. Looking at the diagram above we can see that wave one is a simple sharp zig-zag pattern which goes very fast, while wave 4 is complex combination pattern. As I said this guideline works the other way around as well, anyone between wave 2 and wave 4 could be complex or simple.

Guidelines 3: After 5 motive waves, we get 3 correction waves. So to predict the end of wave A in an ABC we use this guideline, which states that wave A could find resistance at the end of wave 4 in the motive waves. If this doesn’t make sense just play with few charts you will notice that it is true, wave A usually end around the end of wave 4 in the motive wave. Looking at the diagram above we see where wave A find resistance around the price area of wave 4. Which I signalled using the dotted blue box.

CONCLUSION: please remember that the Elliot wave rules cannot be broken, breaking the rules is one of the reason people think that Elliot wave doesn’t work, they create their own Elliot wave rules which are unproven and when they lose they blame the Elliot wave system. The guidelines are not meant to be traded on their own but they assist in giving you a broad view of the market, in terms of where to place stop loss and take profits.

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