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Mr. Ralph Nelson Elliott proposed the theory of Elliott waves to describe price movements in financial markets. In fact, based on Elliott waves in technical analysis, the prices of all assets are continuously rising and falling in the form of repetitive waves. Therefore, people can identify the direction of the market by using the detection of the beginning of Elliott waves, the time ratios of Elliott waves, and generally Elliott wave rules.

Based on this theory, Elliott waves consist of 5 waves, 3 of which are kinetic and 2 are corrective. Kinetic waves always move in the direction of the market trend and corrective waves in the opposite direction. These recurring patterns can be used to predict future market price trends, the price of Bitcoin and other digital currencies, and its rewards and risks.

Read more: Bitcoin price depends on what factors?!

Elliott waves can be identified in consumer behavior and stock price movements. Investors who try to profit from market trends can be described as riding this wave. In the continuation of this article, we will learn more about Elliott Waves, 5th Elliott wave characteristics, automatic Elliott wave counter, time ratios of Elliott waves and disadvantages of Elliott waves, etc. I will pay

## What are Elliot waves?

Many people around the world are making decisions in different financial markets and intend to achieve profitability by correctly predicting the direction of the market movement and accompanying it. These people earn money by buying the assets they want by increasing the price, and in the falling market, they gain profit from the price reduction by opening a short trading position.

For this purpose, financial market traders use strategies and methods such as price action, Dow theory and Fibonacci correction levels, which are among technical analysis strategies. The trading strategy with Elliott waves is one of the important strategies for predicting the market price trend in the future. The basis of Elliott waves, in simple words, is repetitive movements in the capital market.

According to the Elliot Wave Theory, the stock price in the market moves in waves, and by using these repeated waves, it is possible to predict the market price trend in the future.

Ralph Nelson Elliot proposed this theory after observing and identifying repeating fractal wave patterns. According to Mr. Elliott, the structure of various asset price charts is simpler than other analysts believe.

Read more: Fundamental analysis

## Elliot Wave Theory

The theory of Elliott waves consists of 5 waves, 3 of which are kinetic and 2 are corrective. Kinetic waves in this theory are always in the direction of market movement and corrective waves are in the opposite direction. Recurring Elliott patterns are used in predicting the price of digital currencies and the stock market, its rewards and risks.

Elliott’s theory is actually based on Daw’s theory. According to the Dow theory, all movements in the capital market have certain patterns and rules. At first glance, it seems that the movements of the capital market are very random; But we must say that all these movements use a repeating pattern.

Investors and traders of these markets also use these patterns with the help of indicators. Of course, it should be noted that Elliott waves cannot be considered a technical indicator. Because these waves are only a theory to predict the next movements of the market.

## History of Elliott wave theory

Mr. Ralph Nelson Elliott is known as the father of wave theory. At the age of 58, after forced retirement due to his illness, he pursued the study of the stock market. Mr. Elliot studied and examined all 75-year charts of stock market behavior, such as annual, monthly, weekly, daily, hourly, etc. charts. According to his research, the stock market, which was thought to have a chaotic and random behavior, actually followed repetitive patterns.

After the studies conducted by him, in November 1934, Mr. Eliot achieved the equivalent of a wave. He discussed his theory with Detroit investment advisor Mr. Charles J. Collins. And after a lot of research and the passage of a long time, these two people started working together in writing and publishing the book Asl Moj and published it on August 31, 1938.

Mr. Elliot did not stop his research after the publication of the book The Wave Principle, and in the early 1940s he developed his theory and was able to find its relationship with the Fibonacci pattern. Currently, Elliot’s theory and all the research done by him are used by many traders and investors. These people try to ride the wave in order to profit from the market trend.

## The nature of Elliott waves

Mr. Elliot stated that the trend in financial prices is based on the prevailing psychology of investors. He realized that fluctuations in collective psychology constantly appear from waves or repeating fractal patterns in financial markets. Elliott’s theory can be considered similar to Dow’s theory to a large extent; Because both of them are based on the fact that the stock price moves in the form of waves.

Eliot’s recognition of the fractal nature of markets led him to further analyze the details. Fractals are mathematical structures that repeat infinitely many times at smaller scales. Elliott concluded that stock price patterns are the same. He investigated how these repetitive patterns can be used as predictive market indicators in the future.

## The working method of Elliott waves

Elliott waves consist of two types of motivational and corrective waves, each of which has specific rules. According to Elliott’s theory, the price of any digital currency or asset in the financial markets (Bitcoin price in the digital currency market, dollar in the Forex market) moves in the form of repetitive and certain patterns, which are called waves.

These waves are divided into impulse waves and corrective waves. Impulsive waves, which are also called motivational or kinetic waves in Farsi, agree with the general trend in movement. On the other hand, corrective waves refer to waves whose movement is against the direction of the general trend.

Motivational or kinetic waves and corrective waves are nested to create and form larger patterns. For example, in the one-year chart of an asset, it is possible that we are forming a corrective wave, while in the one-month chart, a motivational wave is forming. In this trading situation, whose strategy is based on Elliott waves, it has a bearish view from a long-term point of view and a bullish view from a short-term point of view.

## Types of waves in Elliott theory

As we said, this theory has two types of waves, each of which has different types, which we will discuss further:

### Motive Waves

Elliott’s kinetic or motivational waves consist of 5 micro-waves that together always move in the direction of the market trend. This pattern is the most common motivational wave that is very easy to find. 3 numbers of microwaves are this kinetic wave and the other 2 numbers are corrective.

### Corrective Waves

Corrective waves are moving against the direction of the market trend. Detecting the onset of Elliott waves is time-consuming and complicated. Corrective waves also consist of three patterns A, B and C. The three main types of these waves include flat, zigzag and triangular. The important thing in knowing the types of waves in the Elliott wave theory is that they help you in trading actions. In fact, being able to identify which wave is kinetic or corrective at the beginning will make important changes in your trading decisions.

Kinetic waves are relatively large waves and corrective waves are much smaller. Because correction waves with a small movement, look for small corrections and finally a big correction. Traders often use these waves to identify kinetic waves. Because corrective waves are not a good place for investment and trading. With the market in kinetic waves, it is time to reap big profits.

Traders are always looking for a corrective wave; Because after that, an emotional wave starts immediately. They open their trade exactly at the end point of the corrective wave. At this point the market is at a low price. As the market enters a kinetic wave, traders will have the opportunity to close their trade with a great profit.

## What are the types of Elliott wave patterns?

In the above section, we said that corrective waves have 3 types of waves and kinetic waves have two types. We will introduce each of them below:

### Impulse

One of the most common and simple kinetic waves in the capital and stock market is the impulse wave. This wave itself consists of 5 sub-waves such as 3 kinetic waves and 2 corrective waves. Maybe here you will come across the question of how to recognize this wave in the market. Recognizing the impulse wave is subject to the rules, if they are violated, this wave will not be formed.

The laws of Elliot Impulse waves include the following:

- The second wave is a corrective wave, it should never restore 100% of the first wave.
- The third wave, which is considered a kinetic wave, should not be shorter than waves 5 and 1.
- The fourth wave, which is a corrective wave, should not go higher than the third wave or overlap with the first wave.

### Diagonal

Another type of kinetic waves is the diagonal wave, which is a little more complicated than the impulse wave. These waves, like all kinetic waves, have 5 sub-waves. Diagonal waves are classified into leading and trailing waves. The leading diagonal wave in sub-wave 1 has an impulse wave and the last diagonal wave in sub-wave 5 has an impulse wave. Check the image below for a better understanding of this kinetic wave.

### Zig-Zag

Zigzag is a corrective wave with 3 sub-waves named A, B and C. This wave is strongly moving up or down. Among the 3 sub-waves of zig-zag waves, waves A and C are both kinetic; But wave B is one of the corrective waves.

Zigzag waves basically correct the price level of the previous impali patterns. Also, these waves can be displayed in combination. This means that two to three zigzags are created side by side by connecting a corrective wave.

### Flat

Flat waves are one of the three types of corrective waves, which, like zigzag, are its sub-waves, named A, B and C. The structure of flat waves consists of corrective waves C and A and kinetic waves B. Basically, in technical analysis, flat waves are more difficult to detect than it seems. Because it can be a little different from the picture below. It is possible that wave B will go higher than the beginning of wave A and end, or wave C will exceed the starting point of wave B and end there.

### Triangle

Another corrective wave is the triangular wave which consists of 5 sub-waves named A, B, C, D and E. Basically, triangular waves are simple in teaching Elliott Waves; But all traders practice for a long time to identify and learn them.

## Degrees of Elliott Waves

In the Elliott wave theory, all waves, from the largest to the smallest, are completely organized. For this reason, each of them has degrees that we discuss below:

- cycle
- Primary
- Grand Super Cycle
- Super Cycle
- Intermediate
- Sub-Minuette
- Minuette
- minute
- minor

Elliott waves are a kind of fractal and with the enlargement of any structure or ratio, there is a possibility of changing the next structure. Therefore, some of these degrees may be slightly smaller or larger in the real graphs. In order to check the Elliott wave theory in their trading, traders should find the impulse wave or uptrend in the chart. Then open a long position there and after finishing 5 sub-waves, open your short position. After the end of 5 impulse sub-waves, the market trend is corrected and reversed.

Keep in mind, Elliot’s emoji size may change over time and become smaller or larger. In general, the size of the waves will depend on the size of the previous waves and their ratio. Elliot waves are fractal and their structure changes based on the structure of the previous wave. It should also be said that the Elliott wave theory can be used for long-term strategies and short-term trading. In fact, it can be used and suitable for both transactions and will show you a relatively accurate technical analysis of the future of the market.

## The role of Fibonacci ratios in Elliot waves

Fibonacci numbers start from 1 and the next numbers will be obtained from the sum of 1 and 0. In fact, to get the next numbers of this pattern, get the sum of the previous two numbers with the next number. In this way, a series of numbers until infinity is obtained, which are known as Fibonacci numbers. These numbers include…0,1,2,3,5,8,13,21. In order to obtain Fibonacci ratios, two cases of this pattern must be divided. The Fibonacci ratio is used to support markets and determine resistance levels.

In the meantime, Mr. Elliott found a connection between Fibonacci ratios and Elliott waves. He believed that Elliott wave relationships in time and price are basically displayed on the same Fibonacci ratios, i.e. 38% or 62%. For example, a corrective wave can restore 38% of the previous impulse wave. In Elliot wave theory, Fibonacci ratios are used to find the end point of a corrective wave, after which a kinetic wave begins. Fibonacci ratios allow for the measurement of corrective waves in a trend. For example, wave 2 in corrective waves can be 50% of the length of wave 1.

Fibonacci extension is another tool related to Fibonacci in market analysis. This tool can be used to find milestones in the initial process. If the market is in a bullish and positive trend, the Fibonacci extension shows you where an impulse wave can reach before a correction. If the market is in a downward and negative trend, this tool is used to determine support levels. Of course, the Fibonacci extension is also used to measure and determine price levels, and the amount of profit can be obtained by using it.

## How to identify and interpret Elliott waves

Based on the knowledge you got about the types of Elliott waves and its sub-waves, we decided to use an image to examine how to recognize and dissolve these waves in the stock market. According to the chart below, you will notice that this chart has 8 waves, 5 of which are impulse movements and 3 of which are corrective. The impulse wave is marked with 1, 2, 3, 4 and 5 and the correction wave is marked with A, B and C.

The movement of the ipulse wave is in the direction of the main trend. Note that waves 1, 3 and 5 move in the same direction and waves 2 and 4 move against the direction of the market. Correctional waves usually have 3 sub-waves, in which waves A and C are moving in the direction of correction and wave B is moving in the opposite direction. In this chart, you can see the Elliott wave, which consists of an impulse wave and a corrective wave. This wave shows a set of positive and negative movements in the direction of the market, through which traders will be able to predict the future market.

Another important point is the direction of Elliott waves. It is better to know that a kinetic wave does not always move upwards and a corrective wave does not always move downwards. You can have a complete analysis of Elliott waves by practicing and interpreting the waves as well as training the El Wave software and make transactions in the financial markets along with fundamental analysis and other strategies.

Read more: elwave software training

## Elliott wave indicators

Elliott waves are not always used alone in technical analysis. Rather, in order to predict the market trend, they are used together with a series of indicators and economic news. Because these economic news and indicators play a significant role in the market price trend, which cannot be analyzed only by wave theory.

Below are some of the indicators related to the Elliott Wave theory:

### Relative Strength Indicator (RSI)

Convergence of buying and selling conditions with wave indicators puts the predicted volatility index in the right direction. Therefore, in this situation, traders find a good opportunity to open a new deal.

### simple moving average (SMA)

With the Elliott wave in a negative movement, the simple moving average index predicts the downward movement of the market in the next 50 days. In this way, the traders realize that the price reduction is coming. In the opposite of this case, the positive movement of the Elliot wave indicates an increase in the price.

### moving average divergent or convergent (MACD)

When you are looking for a wave with 5 sub-waves, this indicator can help you. By drawing the diverging or converging moving average indicator, you can find wave 3, which is one of the most powerful waves.

## Methods for detecting the onset of Elliott waves

The following methods can be used to detect the beginning of Elliott waves:

- divergences
- Receive confirmation from lower time frame patterns to use for higher time frame patterns
- Diagnosing price action topics such as resistance and support ranges, movement momentum and strength
- Counting microwaves and receiving confirmation by Fibonacci ratios in larger waves and microwaves
- Clarity of floors and ceilings formed in impulse or forward waves.

## Disadvantages of Elliott waves

Below are some of the disadvantages of Elliott waves:

- Different traders may have different interpretations of Elliot waves in the same chart.
- The complexity of Elliott Wave Counting means that traders need to spend a lot of time learning and training it.
- These waves cannot be used to determine the exact points for entering and exiting the transaction.

These waves have 5 micro-waves that ultimately include a trend or movement. Impulsive waves are Elliott’s most convenient and common properties.

Cryptocurrency markets are one of the best places to use Elliott Waves because they are highly volatile and sentiment can dominate the market.

Using the Elliott wave theory, it is possible to identify the best time to enter and exit the market. Also, for digital currencies, this theory is used to predict the price of financial markets and prevent financial risk in the digital currency market. In addition, it can be used to predict the price of other financial markets such as housing, dollar, gold, etc.