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The Elliott Wave Principle – Based on Ralph Nelson Elliott’s conviction that social or crowd behavior trends and reverses in identifiable patterns (waves) or cycles.
Chapter 2: Wave Ratios and Measurements• This spiral, which takes the form of a Nautilus seashell, is commonly used to describe the
mathematical ratio that Elliott Wave theorists lean on to explain why the stock market follows similar patterns to those found in natural systems, including living creatures on earth and galaxies in space.
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Chapter 2: Wave Ratios and Measurements
• The Fibonacci ratio of 0.618, made famous by a 13th-century mathematician named Leonardo Fibonacci of Pisa, is based on a number sequence, in which the sum of two adjacent numbers forms the next higher number (1, 1, 2, 3, 5, 8, 13 ...).
• It is often referred to as the golden, or divine ratio, because it has been found throughout nature, such as in the DNA double helix, how petals on a flower are arranged, proportions of the human body, a galaxy spiral, and so on ad infinitum.
• In Elliott Wave, the five waves of a motive phase have a Fibonacci relationship with the eight waves of a complete cycle and each wave or phase tends to have a Fibonacci relationship with other waves or phases; thus a retracement phase is often close to 0.382 (1 minus 0.618), or up to 0.618, the length of the motive phase.
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Chapter 2: Wave Ratios and Measurements
• The price distance of each wave is measured as a vertical distance from the beginning of the wave to the end of the wave. The length is measured in price points or units.
• The first wave in a Motive (Impulse) is Wave 1. The measurement of Wave 1 is used to find ratios of other waves. These ratios are not rules, but guidelines in estimating the lengths of different waves.
• Ratios for Wave 2• Fibonacci Rule for Wave 2:
• Wave 2 is always related to Wave 1.
• Common Ratios for Wave 2:• Wave 2 typically is 50% of Wave 1
• or 62% of Wave 1• However there are times of 38% in strong markets
• or 78% to 88% retracements in weak markets.
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Chapter 2: Wave Ratios and Measurements • Ratios for Wave 3
Wave 3 is typically related to Wave 1 by one of the following:• Wave 3 = 1.62 x length of Wave 1• or 2.62 x length of Wave 1 (extended Wave 3)• or 4.25 x length of Wave 1 (extended Wave 3)• However there are times of Wave 3 = Wave 1 or less in weak prices.
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Chapter 2: Wave Ratios and Measurements • Ratios for Wave 4
Wave 4 is related to Wave 3 by one of the following:• Wave 4 = 23% of Wave 3• or 38% of Wave 3• or 50% of Wave 3
• The 23% and 38% are the most common ratios for Wave 4.
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Chapter 2: Wave Ratios and Measurements • Ratios for Wave 5
Wave 5 is related to Wave 1 by one of the following:• Wave 5 = Wave 1• or 1.38 x length of Wave 1• or 1.62 x length of Wave 1
• The Wave 5 = Wave 1 is the most common ratio.
• If Wave 3 is extended to 2.62 to 4.25 x Wave 1, then Wave 5 could be truncated at 0.62 x Wave 1.
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Chapter 2: Wave Ratios and Measurements • The first wave of a Simple A-B-C Corrective (Zig-Zag) is a Wave A.
• Ratios for Wave B
Wave B is related to Wave A by one of the following:• Wave B = 38% of Wave A• or 50% of Wave A (most common)• or 62% of Wave A• or 78% of Wave A
• Ratios for Wave C
Wave C is related to Wave A by one of the following:• Wave C = Wave A (most common)• Wave C= 1.62 x the length of Wave A• Wave C = 2.62 x the length of Wave A
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Chapter 2: Wave Ratios and Measurements
• Once the 5th Wave starts, the Elliott Channel Technique can be used to project the end of the 5th Wave. Once Wave 4 has been completed, draw a straight line between Waves 2 and 4 forming the lower channel line.
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Chapter 2: Wave Ratios and Measurements • Now draw two lines parallel to the lower channel line connecting the tops of Waves 1 and 3.
• Expect Wave 5 to end on one of the two upper channel lines. Usually, if Wave 3 was a normal wave, Wave 5 tends to end on the channel drawn from the Wave 3 top. If Wave 3 was extended and a runaway type of wave, Wave 5 tends to end on the channel drawn from the top of Wave 1.
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Chapter 3: Corrective Waves• Corrections are very hard to master. Most Elliott Wave traders
make money during motive (impulse) waves and lose during corrective waves.
• A motive (impulse) pattern consists of five waves. The corrective pattern consists of 3 waves, with the exception of a triangle.
• An Impulse pattern is always followed by a Corrective pattern.• Corrective patterns can be grouped into two different