Cycles

Elliot believed that there were many cycles of both impulse and corrective waves, and he named each cycle to fit in with his theory that the waves were based around the Fibonacci series of numbers – 1, 2, 3, 5, 8, 13 etc. The names are:

• Grand super cycle
• Super cycle
• Cycle
• Primary
• Intermediate
• Minor
• Minute
• Minuette
• Sub-minuette

Elliot provided several varieties of the main wave, and placed particular relevance on the Fibonacci value of 0.618, as the most common level for a retracement to occur. The examples shown are perfect definitions of the Elliot Wave theory. In the real world, things tend not to be quite so clear. The price action shown in the chart below is taken from the NASDAQ Composite Index, during the later part of 2003. The waves are still there, but somewhat harder to spot to the untrained eye.

NB: Wave 1 continues down of the bottom left of the chart so that it's start is lower then the low of wave 2.

Trading strategy

In theory, to trade using Elliot is simple. You identify the main wave, enter long, and cover or sell short as a reversal occurs.

In practice, things can be rather different; many wave patterns are identified only with hindsight, and disagreements often arise between followers of Elliot as to which cycle the market is actually in at any given time.

A simpler approach is to add the basic 5-3 wave pattern into your tool box and if it confirms what your methodology indicates (e.g. you are thinking of closing a long, you notice that the price has traced a clear five waves up and so EW gives extra confirmation that an exit might be prudent).