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6/1/2014

Elliott Wave Theory, Cycle, Rules and Personality Explained

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Elliott Wave Theory, Cycle, Rules and Personality Explained

Elliott Wave Theory

A premium service meant for traders who

Elliott Wave Theory is quite straightforward. Created by Ralph Nelson Elliott and first published in his book

markets expert, guides you at every turn.

have serious money at risk. Ramki, a

The Wave Principle in 1938, this theory has suffered numerous misinterpretations at the hands of careless
analysts. It is true that Ralph Elliott was not an expert copywriter, and he tried to present a more

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comprehensive version in his final work Natures Laws: The Secret of the Universe in 1946. However, a
diligent student can learn quite a lot by paying attention to not just the main features of the Elliott Wave
Theory, but also to the numerous clues that are strewn in all of Ralph Elliotts works. In this article, I will try and
summarize some of the main points of the Wave Theory. Also explained are Elliott Wave Cycle, the three key
Elliott Wave Rules that are considered the pillars of the Wave Principle, and the Personality of some waves
such as the third wave in a cycle.

The Elliott Wave Cycle


Ralph Elliott found that in an uptrend, or a bull phase of the market, prices went up in five waves. Three of
these waves were in the upward direction, and he called these waves impulse waves. Each of the three
waves was followed by a downward movement, which he called a corrective wave. Here is a clue that is not

If you are a risk seeker, give yourself the

often very clear! Whereas the first and second impulse waves were followed by a smallish correction, the

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downward move that came after the fifth wave up was a larger move. This was so because this last mentioned
downward move corrected not just the preceding impulse wave (the 5th wave) but also the entire five wave

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sequence.
So to recap, in a bull market, we will see three upward moves and two downward moves. Once the five waves
are completed, we will get a correction that will be bigger than the two previous corrections because this
downward move corrects not just the fifth wave, but the entire set of five waves up.

If a sequence of five waves plus three waves is completed as above from a significant low, then the completed

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cycle will represent the first and second waves of a cycle in the time frame of the nest higher degree. Every

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impulse wave is actually made up of a five-wave sequence within itself. Corrective waves are usually made up

(free) update will add additional value.

of three waves, or combinations of three-wave sequences.

Elliott Wave Rules

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The Elliott Wave Principle has just three straight forward rules. In a five wave progression,

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6/1/2014

Elliott Wave Theory, Cycle, Rules and Personality Explained

1. Wave 2 can never exceed the start of wave 1


2. Wave 3 can never be the shortest impulse wave
3. Wave 4 can never overlap wave 1 (i.e. cross into the same price area) expect within a diagonal triangle.

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Easy enough, right? The trouble is to understand how to use these rules to your advantage. In my book Five
Waves to Financial Freedom I have explained all these with numerous examples. But you could see hundreds

the EW Principles. If you put in some more


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effort by doing some homework, you will
be able to name the live waves as they
appear right in front of you in the monitor.

of charts in this blog itself. At Wavetimes.com, there are Elliott Wave examples covering dozens of asset

Coming to the practical side - A work of

classes. For instance, here is a EURUSD example of Elliott Wave analysis.

caution - what you see as "the end" of


wave 5 may be actually "the beginning"

Wave Personality
In addition to giving us the rules of Elliott Wave Theory, Ralph Elliott also discussed the personality of the

and the waves you counted may be subwaves of wave 1. That is the loop hole. Still
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waves at various positions in the cycle. For example, the third wave is usually the steepest wave, and is
accompanied by expanding volume. A corrective wave in the fourth wave position is usually complex in nature.
You will see sudden departures from normative behavior. Also, just when you think a correction is almost
finished, a complex fourth wave will add another level of complexity to the formation. These are just some
examples of wave personality.

Alternation between waves


Another feature of Elliott Waves is the tendency of waves to alternate between long and short, between simple
and complex, between the length s of time that alternating waves spend etc. For example, if wave 2 was a

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simple correction, you should expect wave 4 to be complex. These are valuable clues to the trade that can
offer a real edge in the market, the so-called Elliott Wave Edge.

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Articles on Forbes

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MARKETWATCH

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Fibonacci Ratios in Elliott Waves

on MarketWatch

Any explanation of Elliott Wave Theory, however brief, will be incomplete without a mention of the use of
Fibonacci Ratios. These ratios are computed from the Fibonacci number series that start of like this

Ramkis Articles on Seeking Alpha

1,1,2,3,5,8,13,21. As you can see, each number is the sum of the preceding two numbers. Fibonacci Ratios
are computed from these numbers. The key ratios used in Elliott Wave Analysis are 38.2%, 50%,61.8%,
100%, 138.2% and 161.8%
Generally speaking, the following relationships work.

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Articles on Seeking Alpha

Wave 1 is corrected by wave 2 by between 50% to 100% (note that 50% is obtained by dividing 1 by 2
in the Fibonacci series of numbers)
Wave 3 is usually 161.8% of wave 1
Wave 4 is often 38.2% of wave 3. Occasionally, when wave 1 was a shallow correction, we can see
wave 4 coming down by 50% of wave 3, and very rarely 61.8% of wave 3. If wave 3 was an extension,
then wave 4 is more likely to terminate around the 23.6% retracement level.
Wave 5 is often computed by taking either a 38.2% measure or a 61.8% measure of the distance
traveled from the start of wave 1 to the end of wave 3. If Wave 3 had extended, then there is a high
chance for wave 5 to be equal to wave 1.

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Recent Comments
Trading NIFTY using Elliott Waves by
Ramki of Wavetimes.com (43)
Ramki Ramakrishnan: Hi Sunny,
Thanks for...
Sunny: Hi Ramki, With all the

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6/1/2014

Elliott Wave Theory, Cycle, Rules and Personality Explained


enthusiasm...

Within corrections, in a zigzag correction, wave C is often 161.8% of wave A. If the correction is a flat
correction, then wave C is usually equal to wave A or no more than 138.2% of wave A.

Elliott Wave Analysis of Wockhardt Ltd


(13)
Ramki Ramakrishnan: Prabh,

You can read more about the Fibonacci Number Series here.

Thank you for...

Corrective Waves

prabh: Ramki Sir, Can you post

Most traders encounter difficulties when dealing with corrective waves. Elliott Wave theory has broadly

Yogesh: Thanks Ramki Sir for reply

your expert...
, now...

classified corrections as Zigzags, Flats and Triangles.

Larry duchonvy: Ramki, I noticed


that wave...

A zigzag correction often corrects the previous impulse wave by a significant extent. A zigzag correction is

Ramki Ramakrishnan: Shiva, Glad

made up of two sets of mini-impulse waves separated by a corrective wave. Thus the sub-waves of a zigzag

to see you...

correction tend to be 5-3-5 waves sequence.

Ramki Ramakrishnan: Joe, Thanks


for...

A flat correction, on the other hand, will only correct a smaller portion of the previous impulse wave.

Joe Hentges: Ramki, thank you for

Furthermore, the sub waves of the flat correction will be made up of a 3-3-5 sequence. Notice that in the

the...

zigzag as well as flat correction, the last sub wave is a five wave affair!

Shiva: Very educative analysis.


Ramki Ramakrishnan: Yogesh,

Triangles are further classified as horizontal triangles and leading or ending triangles. The sub-waves of these

Well now you...

triangles have their own personality traits. If it is a leading diagonal triangle, the sub waves are made up of 5-

Ramki Ramakrishnan: Mahesh,

3-5-3-5 waves. But if it is an ending diagonal triangle, the sub waves are 3-3-3-3-3 waves.

This blog...
R Sathyamurthy: Dear Sir, Nice

Dont be alarmed, but sometimes corrections tend to become complex whereby we see combinations of

analysis....

zigzags, flats or triangles. This is why I always advise traders to avoid trading complex corrections. You can

Mahesh: Hi Ramki, The charts are

identify a complex correction using the tendency of waves to alternate in complexity. Occasionally wave 2

very...

becomes a complex wave, in which case your stop loss is anyway supposed to be placed below the start of the

Elliott Wave Analysis of Dubai Stock

wave 1!

Index (8)
essa: Hello Mr. Ramki Is it time to
update...

The Elliott Wave Edge

Elliott Wave Analysis of USD/INR

When a trade uses Elliott Wave Analysis to determine where we are in the big picture, and then computes

(Indian Rupee) (46)


Ramki Ramakrishnan: Hi Satish,

likely levels where a turn is highly probable, then he/she has what I would like to call the Elliott Wave Edge.

Thanks for...

Once he uses all the rules, his knowledge of the personality of the waves, and the price targets using

satish: Please Update on USDINR

Fibonacci Ratios, the trader will be able to determine a price level where he could initiate a position in the
market place. After that, it all boils down to money management. The determination of a low-risk entry level is
the key benefit of doing Elliott Wave Analysis. A trader who has the Elliott Wave edge will find that the

on medium...
TASI MAGIC (15)
Ramki Ramakrishnan: Yousef,

consistent application of the Elliott Wave analysis to his trading activity will produce a series of winning trades
that will make him money over time. You can read more about the Elliott Wave Edge here.

Yes. I have a...


Elliott Wave Analysis and Seth
Klarmans call on Tesla Motors (17)
Ramki Ramakrishnan: Tim,

Observe that the...

Tw eet

tim: Ramki, is it correct for TSLA


that 5...

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Posted by Ramki Ramakrishnan at 6:03 pm

Will Rogers
"I am not as concerned about the return on
my money as I am about the return of my
money"

Vic Sperandeo
"Many people make the mistake of thinking
that market behavior is truly predictable.
Nonsense. Trading in the markets is an
odds game, and the object is always keep
the odds in your favor."

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