Elliott wave theory states that market movements are a sequence of population psychology cycles. Elliott wave patterns are formed according to market sentiment that alternates between bullish and bearish cycles.
Elliott wave counting rules
- The third wave should not be the shortest wave (law). it means that the third wave is always higher than at least one of the other two waves (1 or 2). Usually the third wave is longer than both waves. You should never look for a third wave that is shorter than the other two waves. Sometimes the third wave ends at parity points, but it is never shorter. There are no exceptions to this rule.
- The fourth wave should not overlap with the first wave (law and guide). it means that that the end of wave 4 should not be below the highest point of wave 1. This rule is not violated in markets with high liquidity. In commodity markets, 10-15% overlap is acceptable. Anyway, having an overlap is the end of the job.
In general, Elliott Waves can be used in conjunction with other forms of technical analysis, including technical indicators, to identify specific opportunities. Traders may have different interpretations of the Elliott wave structure of the market at a given time.