We’ve published many articles dedicated to the Elliott Waves analysis here on ForexGator.com and there is a good reason for that. Elliott Waves is one of the few trading theories that allows forecasting of a target from both; a price and a time perspective.
Traders are attracted to this trading theory because it looks to have a simplistic approach. The market is supposed to move in five waves and then correct with three different ones in the opposite direction.
While this is completely true, traders are missing one big important, crucial point; a five-wave structure corrected by a three-wave one represents a cycle. Elliott discussed the presence of multiple cycles that should start from the bigger time frame usually and subdivide to the lower ones.
Cycles with Elliott Waves Theory
A cycle is described as a full-trip move the market is making. Imagine a bearish trend; a full cycle is represented by a five-wave impulsive move to the downside, followed by a three-wave corrective move to the upside. That is a cycle. The tricky part being that it is only part of a cycle, of a bigger degree. Either it is the start of a cycle of a bigger degree or its end.
The image below shows what a cycle is and what should traders look at when talking about a five-wave and a three-wave structure. The example is for a bearish scenario, but it is identical (in theory) to a bullish one.
The confusion starts when interpreting the nature of such a cycle. Elliott said that there are different ones, starting from the bigger time frames usually.
Any MetaTrader chart shows the data from the monthly time frame but data can be found on yearly candles as well. No matter the data, it should be interpreted the same.
For the sake of an example, we’ll use the monthly chart as the start of a bigger degree cycle, the biggest one possible, according to Elliott. This should be called a super-cycle and the classical labeling should be with Roman numbers: I, II, III, IV, V.
However, please read again what has been said in this article so far. Remember that the image below represents the pictogram of a cycle. We don’t know what kind of a cycle!
It could be the biggest one possible, or it could be one of a lower degree. This is possible even when the count starts from the monthly chart.
Having said that, the first five-wave structure in the image below can be the first wave of that super-cycle mentioned above! In this case, the three-wave structure that follows would be the second wave (or only part of the second wave) of the same super-cycle.
Another possible arrangement would be that the five-wave structure is the end of the 5th wave of a bigger degree, in a super-cycle arrangement. In this case, the a-b-c that follows is only the first correction or the A-wave of the previous super-cycle.
The first possibility is explained in the image above, and the next example is to be found below. However, these are not the only places where a cycle, as defined by Elliott, can appear. Other places are:
– The 3rd wave in an impulsive move followed by a corrective 4th wave
– The a-wave in a zigzag followed by a corrective b-wave
– The c-wave in a zigzag followed by a corrective a-wave of a different cycle
How about a situation when the market is forming two impulsive waves, consecutive ones, but in opposite directions? Is this possible?
Or two corrective waves, consecutive ones, in opposite directions? The answer in both cases is yes, it is possible, and they are part of two different cycles.
The details presented here and the examples shown are not meant to confuse anyone. The purpose is to make you understand that, while Elliott Waves seems to be a simplistic approach to analyzing the market, this is not true.
In fact, it is one of the most complex theories ever created. These cycles and all the other patterns that are part of the theory are based on human nature, the way we think as traders, the way we act and how this is usually seen in markets.
It is only normal to have corrections and fake moves as our actions as humans are not predictable. Emotions are part of our decision-making process and the market is reflecting this one hundred percent.
This is the beauty of trading and therefore it is so mysterious; no-one can predict human nature for a single person, not to mention for so many traders at once. Thus, profiting from the moves the market makes can be possible only after understanding the drivers in this market and why it is acting the way it does.