An Introduction to Our Elliott Wave Glossary
Elliottology: An Introduction to Our Elliott Wave Glossary
Financial markets often appear unpredictable—constantly swinging up and down in response to a mix of fundamental factors and investor psychology. Some traders rely primarily on fundamental indicators, while others prefer purely technical approaches. Yet a growing number explore Elliott Wave Theory, a structured method that suggests these market fluctuations follow recognizable patterns shaped by crowd behavior. It’s precisely this exciting dimension of wave analysis that Elliottology aims to clarify.
Originally pioneered in the 1930s by R. N. Elliott, wave theory rests on the belief that price movements aren’t just random fluctuations; instead, they reveal cyclical patterns echoing human sentiment. The theory classifies market swings into impulse waves (driving the main trend) and corrective waves (temporary counter-movements). Each major wave can, in turn, be subdivided into smaller sub-waves, forming a fractal structure that repeats itself at multiple timeframes.
At Elliottology, our goal is to provide you with an all-inclusive glossary covering both the fundamental and advanced concepts of wave theory:
- Core Terms – From impulse waves and corrective waves to motive waves and sub-waves.
- Complex Patterns – Diagonals (leading/ending), extensions, truncations, W-X-Y combos, and more.
- Risk & Invalidation Points – Key levels like the wave 1 origin, cardinal rules, and common stop-loss strategies.
- Momentum & Volume Clues – How indicators such as RSI or MACD might confirm a wave 3 extension or warn of a wave 5 divergence.
Alongside definitions, we’ll provide insights on practical usage—such as recognizing the shape of a zigzag correction (and why it often appears under certain market conditions), or spotting an extended wave 3 to catch major trend momentum. We also dive into risk management applications, because wave theory is not just about labeling charts but also about mitigating drawdowns and placing precise stops at logical wave boundaries.
We want our Elliottology to serve both newcomers—who may be puzzled by terms like “expanded flat” or “double zigzag”—and experienced wave analysts seeking a handy reference. Each entry aims to demystify the technical jargon and link it to real-world market behavior. By illuminating the “why” behind each wave formation, you’ll better anticipate when and how the next major price swing might unfold, whether you trade stocks, forex, crypto, or commodities.
We hope that browsing through these definitions, tips, and sample illustrations will deepen your understanding of Elliott Wave Theory and reinforce its practical value. Whether you’re a casual observer of the markets or a dedicated wave counter, Elliottology aspires to be your go-to resource—a place to answer the inevitable “But what does that term actually mean?” moments. May it guide you toward a clearer grasp of wave structures and more confident market decisions!
Wave Basics
1. Foundational Terms & Wave Basics
1.1 Impulse Wave
- Definition: A five-wave sequence (labeled 1,2,3,4,5) moving in the direction of the dominant or larger trend.
· Core Features:
- Wave 3 is not the shortest among waves 1, 3, 5.
- Wave 2 cannot retrace more than 100% of wave 1.
- In a standard impulse, wave 4 does not overlap wave 1’s price territory. (Any overlap suggests a diagonal or invalid count.)
· Practical Note: Typically wave 3 is the largest and most energetic wave, often aligning with strong momentum or fundamental drivers.
1.2 Corrective Wave
- Definition: A wave or series of waves (A-B-C in its simplest form) moving against the direction of the larger trend.
· Structure:
- Usually 3 sub-waves: wave A, wave B (a partial reversal of A), and wave C (continuing A’s move).
- May form more complex combos (W-X-Y) or patterns (flats, triangles, zigzags).
- Practical Note: Corrections can appear deceptively calm or extremely volatile. Identifying them properly is crucial to avoiding false entries or catching retracements.
1.3 Motive Wave
- Definition: An overarching category for waves moving in the trend direction, i.e., Impulse or Diagonal waves.
- Why It Matters: Recognizing “motive waves” means the market is pushing strongly in a certain direction. Traders often look to enter on corrections preceding motive waves for better risk/reward.
1.4 Cardinal Wave Rules
- Rule #1: Wave 2 cannot retrace 100% of wave 1.
- Rule #2: Wave 3 cannot be the shortest of waves 1,3,5.
- Rule #3: In a normal impulse, wave 4 does not overlap wave 1’s price territory.
- Practical Application: Each rule helps define “invalidation points.” If broken, your wave count is incorrect, prompting exit or reanalysis.
1.5 Wave Degrees
- Definition: The hierarchical levels of wave patterns—e.g., Grand Supercycle, Supercycle, Primary, Intermediate, Minor, Minute, etc.
- Fractal Principle: Each wave within a larger wave also subdivides into smaller waves of a lesser degree.
- Example: A wave (3) on a weekly chart might internally subdivide into wave i, ii, iii, iv, v on a daily chart.
1.6 Sub-Wave
- Definition: A smaller wave inside a larger wave. For instance, wave 3 subdivides into five sub-waves labeled (i), (ii), (iii), (iv), (v).
- Why It Matters: Sub-wave analysis clarifies where you are in a wave’s internal structure, often refining entries or exits.
1.7 Wave Count (Labeling)
- Definition: The process of identifying and labeling each wave in real time.
- Challenges: Maintaining flexibility if a count breaks a cardinal rule. Many traders keep a primary and alternate wave count to adapt to new price action.
1.8 Fractal Nature
- Definition: Elliott Waves are fractal, meaning each wave consists of sub-waves that replicate the larger wave structure.
- Implication: Patterns appear at all timeframes, but that also means wave analysis can become complex if you attempt to label every small fluctuation.
1.9 Invalidation
- Definition: A wave rule violation point (e.g., wave 2 crossing wave 1 origin).
- Trading Usage: Often used as a mechanical stop-loss level, ensuring minimal emotional debate if wave assumptions fail.
Impulse Waves
2. Impulse Waves
2.1 Extension (Extended Wave)
- Definition: When one wave, typically wave 3 (or 5), grows much longer than usual (1.618–2.618× or more relative to wave 1).
- Why It Occurs: Often reflects strong momentum, bullish fundamentals, or “mania” buying in a bull wave.
- Trading Insight: If wave 3 is extended, wave 4 might be relatively shallow or wave 5 might be truncated. If wave 5 extends, the final blow-off can be extreme before reversal.
2.2 Truncation (Truncated Wave 5)
- Definition: Wave 5 fails to surpass wave 3’s peak or trough.
- Significance: Signals the trend exhausted sooner than expected. Watch for abrupt reversals if wave 5 truncates.
- Example: If wave 3 topped at $100, wave 5 tries to push beyond but only hits $98 then collapses—classic truncation sign.
2.3 Leading Diagonal
- Definition: A five-wave pattern (wave 1 or wave A) with overlapping sub-waves. Typically looks like a wedge forming an initial move.
- Rules: Overlaps allowed, but wave 2 still cannot go below start of wave 1 in total. Sub-waves can be 5-3-5-3-5 or 3-3-3-3-3.
- Trading Note: Leading diagonals can trick wave counters who expect a standard impulse. Knowing it’s a diagonal can shape your wave 2 or wave B expectations.
2.4 Ending Diagonal
- Definition: Occurs in wave 5 (or wave C) at the end of a larger wave. Overlapping sub-waves, wedge-like shape, diminishing volume.
- Implication: Usually heralds a dramatic reversal or correction once complete.
- Example: Market creeps upward in wave 5 with overlapping waves—once the diagonal’s apex forms, price often drops sharply.
2.5 Wave 3
- Definition: Typically the strongest, largest wave in an impulse.
- Characteristics: High volume (in stocks/futures), strong momentum, unstoppable sentiment in a bull wave.
- Rule: Cannot be the shortest of waves 1,3,5. If wave 3 is physically smallest, your wave count is suspect.
2.6 Wave 5
- Definition: The final wave in a 5-wave impulse.
- Behavior: Might show RSI or MACD divergence if momentum is less than wave 3. Possibly extended if fundamentals remain bullish or mania grows.
- Trading Approach: Often a point to exit or short if a wave 5 blow-off is recognized.
Corrective Waves
3. Corrective Waves
3.1 Zigzag (5-3-5)
- Definition: A three-wave correction where wave A and wave C are each 5 sub-waves, wave B has 3. Often sharper or deeper.
- Retracement: Commonly 50–61.8% of the prior impulse.
- Example: A wave 2 often forms a zigzag, quickly retracing a significant portion of wave 1’s gains.
3.2 Flat (3-3-5)
- Definition: Another three-wave correction, wave A and wave B each 3 sub-waves, wave C has 5 sub-waves.
- Variations: Expanded Flat (wave B surpasses wave A’s start) or Running Flat (wave C ends shy of wave A’s end).
- Look and Feel: More sideways than zigzags. Often wave 4 in a bull impulse is a flat.
3.3 Triangle (A-B-C-D-E)
- Definition: A converging 5-leg sideways pattern. Each sub-wave is 3 waves. Typically wave 4 or wave B.
- Subtypes: Contracting vs. expanding, though contracting is more common.
- Trading Note: The final wave E often leads to a strong breakout. In wave 4, wave 5 might swiftly follow once the triangle ends.
3.4 Complex Combos (W-X-Y, W-X-Y-X-Z)
- Definition: Multi-part corrections linking simpler patterns (zigzag, flat) with “X” waves. More sideways or time-consuming.
- Why It Matters: These can frustrate wave counters expecting a single A-B-C. If wave labeling is ambiguous, it might be a combo.
- Recommendation: Many prefer waiting for combos to resolve rather than forcing trades mid-pattern.
Additional Elliott Concepts & Tools
4. Additional Elliott Concepts & Tools
4.1 Alternation Principle
- Definition: If wave 2 is sharp, wave 4 tends to be sideways. If wave 2 is mild/flat, wave 4 is more complex.
- Usage: Helps guess wave 4 structure/time, refining risk planning.
4.2 Channeling Technique
Type 1:
- Definition: Drawing a channel across wave 1 & wave 3 peaks, then parallel line through wave 2, anticipating wave 4 boundary.
- Benefit: Visually frames impulse waves, showing potential wave 4 support or wave 5 extension limit.
Type 2:
- Definition: Drawing a channel across wave 2 & wave 4 lows, then parallel line through wave 3, anticipating wave 5 peak.
- Benefit: Visually frames impulse waves, showing potential wave 5 extension limit.
Type 3:
- Definition: Drawing a channel across start point & wave 2 low, then parallel line through wave 1, anticipating wave 4 boundary.
- Benefit: Visually shows impulse waves, showing potential wave 4 support.
4.3 Throw-over
- Definition: In diagonals, price may briefly exceed the wedge boundary. A sign the pattern’s climax is near.
- Risk Aspect: If you’re shorting an ending diagonal, a throw-over can cause a final stop-out or quick drawdown before reversing.
4.4 Wave Ratio Analysis
- Definition: Using Fibonacci numbers to measure wave 3 or wave 5 length relative to wave 1. Typically 1.0×, 1.618×, 2.0×, 2.618×, etc.
- Application: Traders set partial TPs at these fib expansions to secure gains.
Invalidation and Risk Terms
5. Invalidation and Risk Terms
5.1 Invalidation Level
- Definition: A specific price level that negates the wave assumption if crossed.
- The start point of wave 1 for wave 2 because of rule 1. (Wave 2 cannot retrace the entirety of wave 1.)
- The peak of wave 1 for wave 4 because of rule 3. (Wave 4 can not olverlap wave 1.)
- Trading Usage: Crucial for mechanical stops, ensuring minimal indecision once broken.
5.2 Wave 1 Origin
- Definition: The absolute start of wave 1 in an impulse.
- Significance: In a bullish wave 2 scenario, if wave 2 crosses wave 1 origin, the bullish impulse fails, forcing an exit.
5.3 Overextension
- Definition: Wave 3 or wave 5 surpassing typical expansions, e.g., beyond 2.618× wave 1.
- Risk: Overextensions can revert sharply if momentum suddenly evaporates.
5.4 Stop-Loss Clusters
- Definition: Zones around wave origins or wave overlap lines where many wave-based traders place stops. A break can trigger a cascade, fueling the next wave.