In today’s blog, I want to take things back to basic when it comes to trading the Elliott Wave Theory – “theory”. There are 3 rules that you must follow to be a good trader.
Within the theory, we have rules and guidelines. Guidelines are based on characteristics of the waves, Fibonnaci guidelines in terms of Retracements and Extensions, alternations and many more. Guidelines do not necessarily have to be religiously met, for example, if wave 2 is a zigzag and wave 4 is not an alternation, this does not mean the wave count is not valid.
Rules on the other hand, they cannot be broken. There are no negotiations on this. Good thing is they’re only 3 of them.
Lets break them down one by one.
Rule 1 – Wave 2 cannot exceed the origin of Wave 1.
There is a reason for this and it is quite obvious. If the origin of Wave 1 is broken, that 5 wave sequence into wave 1 is no longer valid. Wave 1 must remain intact in order for the trend it is supporting to be valid. Therefore, a 5 wave into Wave 1 and then a 3 wave sequence into wave 2 is what you ideally want to see.
Here is an illustration:
Rule 2 – Wave 3 cannot be the shortest wave
As Wave 3 is the strongest and most impulsive wave. For a 5 Wave sequence to be valid, Wave 3 cannot ever be the shortest wave. Wave 3 usually has the most volume as opposed to Wave 1 or 5. Wave 3 is usually the extended wave. Even if wave 3 is not the extended wave, it still cannot be the shortest wave. Wave 3 in that case is the same length as the other non-extended wave.
Here is an illustration:
Rule 3: Wave 4 cannot breach into Wave 1’s territory
There are two motive waves. Impulse and Diagonals. In order for an impulse wave to be valid wave 4 must not breach into the territory of wave 1. This rule is for sub-waves of an impulse and the wave itself just completed wave 3. This keeps the trend flowing and valid.
However, in a case of diagonals, in wave 1 and 5, occasionally they will unfold with overlapping action. This rule does not count then.
Here is an illustration:
I cannot remember the last time I have counted waves and not take these rules into consideration. You must be consciously aware of these rules when counting waves to validate your count!
