A Beginner’s Guide to Learning and Applying Elliott Wave in 15 Easy Steps

by | Elliott Wave Articles

1. Understand the basic principles of Elliott Wave:

Elliott Wave is a technical analysis tool that is based on the observation that market trends tend to move in waves, with each wave representing a specific stage in the market’s overall trend. According to Elliott Wave Principle, market trends move in a specific pattern that consists of five waves in the direction of the trend and three waves against the trend.

2. Memorise the Elliott Wave rules:

To be good at using Elliott Wave you must learn Elliott Wave rules from a publication that is reliable. I recommend my own book Pure Elliott Wave by Lara Iriarte, CMT. And I recommend you read the rules and guidelines in the book once a day every day until they are known by heart.

3. Memorise the Elliott Wave guidelines:

There are guidelines that practitioners of Elliott Wave should follow when using Elliott Wave, including the guideline of alternation, channeling techniques, and the guideline of equality or proportion.

4. Learn the labels for each wave:

Impulse waves, which move in the direction of the trend, are labeled 1, 2, 3, 4 and 5. Corrective waves, which move against the trend, are labeled A, B, and C (or W, X and Y, and rarely W, X, Y and Z).

5. Understand the characteristics of each wave:

Impulse waves tend to be strong and stable, while corrective waves are often weaker. When the market moves in an impulse the direction of the trend is clear, when the market moves in a corrective wave the market is in a counter trend direction or consolidating. By recognizing these characteristics, practitioners of Elliott Wave can more accurately identify the stage of the market’s trend.

6. Learn about the different types of Elliott Wave patterns:

There are several different types of Elliott Wave patterns that practitioners of Elliott Wave should be familiar with, including simple corrective patterns, complex corrective patterns, and diagonal patterns.

7. Practice identifying Elliott Wave patterns:

To gain proficiency with Elliott Wave, it is important to practice identifying wave patterns in the market. This can be done by analyzing historical price charts and identifying the stage of the market’s trend at different points in time.

8. Identify the stage of the market’s trend:

By analysing the waves in the market, practitioners of Elliott Wave can identify the stage of the market’s trend and make a prediction on the next direction for price.

9. Use Fibonacci ratios to support Elliott Wave predictions:

Fibonacci ratios, which are based on the mathematical principles of the Fibonacci sequence, can be used to calculate targets.

10. Use other technical analysis tools to confirm Elliott Wave predictions:

In addition to analyzing the waves in the market, practitioners of Elliott Wave can also use other technical analysis tools, such as trend lines , momentum and strength indicators, to support their Elliott Wave predictions and improve the accuracy of their analysis.

11. Understand rare structures reduce the probability of the Elliott wave count:

Running flats are extremely rare, truncations are rare, double and triple flats are rare and triple combinations are rare. Elliott Wave counts which avoid labeling these structures will have a higher probability. When labelling a movement as one of these rare structures or occurrences be aware that subjectivity may be driving the analyst rather than a truly objective Elliott Wave count.

12. Use Elliott wave rules to manage risk:

Risk management is the most boring and overlooked aspect to trading, but it is the most important. Luckily, Elliott wave has inbuilt risk management. Identify the price point beyond which the wave count would be invalidated, use that price point to calculate the risk of entry and know when to exit a losing position. Because all (but one) Elliott wave rules are absolute, the price point where a wave count is invalidated is absolute.

13. Learn to ignore the noise of the market news:

The Elliott wave principle states it is the market that drives the news, not the other way around. Paying too much attention to news and events can influence analysis. To keep your Elliott wave analysis as objective as possible, it is better to pay less attention to news. If you are completely new to Elliott Wave, then you may want to start by viewing the excellent movie History’s Hidden Engine. This movie explains the fundamental `why` of the Elliott Wave Principle.

14. Understand that no forecasting method is perfect:

No forecasting method can guarantee success, and it is important to manage risk and be prepared for the possibility of losses. Know when your Elliott wave count is invalidated by knowing when it breaks an Elliott wave rule, and use these specific price points to calculate risk and reward and prevent runaway losses.

15. Practice using Elliott Wave:

To gain proficiency with Elliott Wave, it is important to practice analyzing market trends and making investment decisions, for example performing an Elliott Wave analysis of an specific stock. This can be done through paper trading or by using a demo account.