Chapter 31 · Elliott Wave Theory
Elliott: the three rules and the counting problem
What is a rule, what is only a guideline, and why two analysts count the same chart differently.
56 of 66 · 11 min
Five waves up, three waves back
Elliott is usually taught as a shape to recognise. It is more usefully taught as three rules that cannot be broken and a set of guidelines that often are — because the difference between them is the difference between a count that is wrong and a count that is merely unusual.
The three rules. Break one and the count is invalid.
- 1Wave 2 never retraces more than 100% of wave 1. If it does, wave 1 was not wave 1.
- 2Wave 3 is never the shortest of waves 1, 3 and 5.
- 3Wave 4 never enters the price territory of wave 1 (in a standard impulse).
Worked: testing a count
| Wave | From | To | Size |
|---|---|---|---|
| 1 | Rs 320 | Rs 395 | Rs 75 |
| 2 | Rs 395 | Rs 342 | Rs 53 retraced |
| 3 | Rs 342 | Rs 505 | Rs 163 |
| 4 | Rs 505 | Rs 448 | Rs 57 retraced |
| 5 | Rs 448 | Rs 540 | Rs 92 |
- 1Wave 2 retraced 53 ÷ 75 = 71% of wave 1. Under 100%. Rule 1 holds.
- 2Wave 3 at Rs 163 is the largest of 1, 3 and 5. Rule 2 holds.
- 3Wave 4 bottomed at Rs 448. Wave 1 topped at Rs 395. Wave 4 did not enter wave 1's territory. Rule 3 holds.
- 4The count is valid. That is not the same as saying it is correct — only that it is not disqualified.
Guidelines, which are frequently broken
| Guideline | How often it holds |
|---|---|
| Wave 3 is often the longest and never the shortest | The 'never shortest' half is a rule; 'often longest' is a tendency |
| Wave 2 commonly retraces 50-61.8% of wave 1 | Common, not required |
| Wave 4 commonly retraces 38.2% of wave 3 | Common, not required |
| Waves 2 and 4 alternate in character | A tendency, useful for anticipating shape |
| Wave 5 often ends near a channel line drawn off 1 and 3 | A tendency |
Corrections, where most counts go wrong
- Zigzag (5-3-5) — sharp, deep, the most recognisable.
- Flat (3-3-5) — sideways, retraces less, frequently mistaken for a continuation.
- Triangle (3-3-3-3-3) — contracting range, almost always appears in wave 4 or wave B, never immediately before the end of a move.
- Combination — two corrections joined. This is where the count becomes unfalsifiable in practice.
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