Guidelines for Applying Elliott Wave Theory [ChartSchool] (2024)

Table of Contents

The Guideline of Equality says that two of the motive sub-waves in a five wave sequence will tend toward equality, which is generally true of the non-extended waves.

This means that, when Wave 3 of an impulse wave is the extended wave, Wave 5 will approximately equal Wave 1 in price. This is useful for potentially projecting the end of Wave 5 in an impulse if you recognize Wave 3 as an extended wave.

The Guideline of Alternation within an Impulse says that the forms for Wave 2 and Wave 4 will alternate. If Wave 2 is a sharp style of correction, Wave 4 will be a sideways style of correction. If Wave 2 is sideways, Wave 4 will be sharp. This is useful for anticipating the end of a Wave 4 correction within a suspected impulse.

The Guideline of Depth of Corrective Waves says that when the market goes into a correction, it often will correct to the territory of the previous Wave 4 of lesser degree. This does not necessarily mean that it will reach the bottom of the previous 4th wave, but rather that we should expect it to reach the span of the previous Wave 4 of lesser degree. This is often a good place for a market to find support (or resistance) before the trend moves on.

The Guideline of Channeling is a technique to project the potential end of waves within impulses. Although channeling can be used for corrective waves, it really boils down to the application of trend lines and doesn't have any hard tendencies for corrective applications. As for impulse waves, Elliott noticed that channel lines often mark their boundaries with sometimes dramatic precision.

There are three ways that channeling can be used for projecting the end of waves, but they all use the same technique. They all require three points - beginning and ending of waves - to create their channels. This technique can be used for projecting the ends of Waves 3, 4 and 5.

Projecting the end of Wave 3: Draw a trend line from the beginning of Wave 1 to the end of Wave 2. Project a parallel line off the end of Wave 1. There is a potential for Wave 3 to end when it reaches the projected trend line.

Projecting the end of Wave 4: Draw a trend line from the beginning of Wave 2 to the end of Wave 3. Project a parallel line off the end of Wave 2. There is a potential for the Wave 4 correction to end when it reaches the projected trend line.

Projecting the end of Wave 5: Draw a trend line from the beginning of Wave 3 to the end of Wave 4. Project a parallel line off the end of Wave 3. There is a potential for Wave 5 to end when it reaches the projected trend line.

About half of the first waves seen are part of the basing process and tend to be heavily corrected by Wave 2. Many people feel that this is one more opportunity to trade in the direction of the previous trend, and, if that was down, many will sell short. However, market breadth and volume will subtly increase.

The other 50% of first waves will rise from large basing price movement formed by the previous correction. These tend to be dynamic and only moderately retraced. This is a good probable spot to have a Wave 1 extension.

Fifth waves tend to be less dynamic and display slower speed of price change than the previous waves. They will usually be accompanied by lesser volume and breadth.

Of course, if the fifth wave is the extended wave, this will not be the case in terms of price change. In advancing fifth waves, optimism is extremely high despite a narrowing of breadth. However, the fifth wave of an extended fifth will lack the change of the previous waves and give clues about a change in direction.

These three articles have gone over the rules of Elliott Wave Theory in some detail. However, as stated before, putting Elliott Wave to use will take some practice. Nevertheless, if you persist in applying the rules, eliminating non-conforming counts and looking at the personality of the waves you are counting, you will find satisfaction in applying Elliott Wave Theory.

You will often find that it is necessary to adjust the count you made to conform to new data. Don't get frustrated by having to make adjustments – it paves the way to a more accurate wave-count and helps to refine your skills. This is something that is expected in doing Elliott Wave analysis as the skills in applying it come through practice.

Not every nuance of Elliott Wave Theory has been discussed here. There are many books written on the subject. Here are a few book recommendations that are considered by many to be excellent resources in helping one to apply Elliott Wave:

• The Elliott Wave Principle by Frost and Prechter: This is considered to be the main primer for the theory.

• Mastering Elliott Wave Principle by Constance Brown: this book offers excellent techniques in recognizing the wave.

• Visual Guide to Elliott Wave Trading by Wayne Gorman and Jeffrey Kennedy: This book offers good advice on how Elliott Wave can be used in trading.

One subject that is not discussed is the application of Fibonacci counts and ratios to Elliott Waves. This is a broad and important subject, but it is not only applied to Elliott Waves, and it is too large to cover here. The books mentioned above will go into some detail on how this subject can help when applying Elliott Wave.

You can use our ChartNotes annotation tool to add Elliott Wave notations to your charts. Below, you'll find an example of a chart annotated with Elliott Wave notations.

To learn more about how to add these annotations to your charts, check out our Support Center article on ChartNotes' Text Annotation Tools.