Waves that move the market in the direction of its main trend either up or down are called Impulse waves.
1. Impulsive waves are made up of 5 waves which themselves are made up of 5 waves. This is called the fractal nature of waves. This fractal nature of waves can be carried down to the smallest time frames. You may hear that we are in W5 of W5 of W5 of daily W5. Fractals within fractals within fractals ... This is important to a trader when he/she is trying to catch the end of a move while waiting for all patterns to be complete. Trading a reversal as it is completing its final wave into a strong resistance or support, is a very high probability trade.
2. Within a 5 wave pattern, Waves 1, 3, & 5 are themselves impulsive.
Below is an illustration of impulsive waves that move the market in its trending direction.
3. Within this 5 wave impulsive pattern depicted above, Waves 2 and 4 are corrective. We will cover corrective waves later. These corrective waves can be either simple or complex and one finds the lower the timeframe, the more complex these corrections become. Simple corrections are 3 waves (ABC or Zig Zag) and complex corrections are combinations of 3 and 5 wave structures.
4. In a 5 wave impulsive pattern, one of the impulsive waves (W1, 3, or 5) will generally extend and be longer than the other two. In the case of ES, Wave 3 is usually the extended wave. (Commodities, it is often Wave 5).
5. Truncation: Sometimes when the market is weak, we see a different reaction from Wave 5. We see a failed W5. A hint that W5 might fail is a 5 wave pattern that is completing below the level of W3. When we see a W5 failure (truncation), we can expect a deeper than normal correction.
6.An ending diagonal is a special type of wave that occurs in the 5th wave position when the preceding 3rd wave has gone "too far too fast". Ending diagonals can also be seen, sometimes, in the c wave of an "ABC". In all cases they are found at the termination of larger patterns suggesting exhaustion of the trend. Ending diagonals take a wedge shape with a sub waves of 3-3-3-3-3. A rising diaganl is bearish followed by a sharp decline and a falling diagonal id followed by an upward thrust. EW study helped to identify the "ending diagonal" possibility when Nifty made its low @ 2539 in Mar.09. Wave Personality: First waves are part of basing formations and "sell on rise" continues, though breadth and volumes tend to rise with prices retrecing the previous decline in shorter time. Second waves retraces much of the first wave convincing the bears that the downtrend is still on and the sell on rise has yielded good results and is followed with declining volumes. Third waves are strong and broad and the trend is unmistakable. They generative highest volumes and tend to be extended with many gaps in them. Fourth waves are predictable in both depth and form because of alternation as well as their tendency to terminate near the 4th of the previous time cycle and also a small break of the trendline.Lagging stocks build their tops. Fifth waves can be explosive and quite sharp if third wave has extended as it did in 2007-2008. And if 3rd wave was quite powerful, 5th can be an ending diagonal as it happened during the decline in year 2008-2009(A wave down).
The following is a summary of points that help to project price targets based on wave relationships:
The best approach is "Whatever Elliott rule will not allow, you can deduce that whatever remains is the proper perspective, no matter how improbable it may seem".
Wave Principle trains the trader/ investor to discern what the market is likely to do next before it does it. Wave principle limits the possibilities and then orders the relative probabilities of possible future market paths.
When you have conquered the essential task of applying a method expertly, you have done little more than gather the tools for the job. When you act on that method, you encounter the real work: Battling your own emotions. Thus it makes it clear that "Analysis" and "Making money" are two different skills and there is no way to understand that battle off the field....Only speculating in the real markets can prepare you for "Speculation in Markets". And you must do it yourself. Choose the wave principle..It will start you thinking properly and that is a first step on the path to trading successfully.
Get Rich Slowly.