Elliott waves
Elliott wave theory says markets move in repeating waves: five waves with the trend (an impulse) and three waves against it (a correction).
How it works
The theory was proposed by American accountant Ralph Nelson Elliott in the 1930s. It holds that crowd mood swings between optimism and pessimism in repeating patterns. An impulse is waves 1–5: waves 1, 3 and 5 move with the trend, 2 and 4 are pullbacks. A correction is usually three waves labelled A, B and C.
An impulse has three hard rules. Wave 2 never retraces beyond the start of wave 1. Wave 3 is never the shortest of waves 1, 3 and 5. Wave 4 does not enter the price territory of wave 1. If any rule breaks, the count is wrong. Fibonacci levels are often used to project wave targets.
The big problem is subjectivity. Two analysts can count the same chart differently, and counts often get rewritten as price moves. So Elliott waves work better as a map of possible scenarios than as a precise forecast.
A coin rises from $10 to $15 (wave 1) and pulls back to $12 (wave 2). Rule check: if price drops below $10, it was not wave 2 and the count fails. If wave 3 reaches $20, then in an impulse wave 4 should not fall below $15, the top of wave 1.
The mistake is bending the count to fit the forecast you want and skipping the stop because 'it is only wave 2'. When a count fails, people simply relabel it, but the money is already lost. Use the wave rules as invalidation points: if a rule breaks, the scenario is off and the position is closed.
Questions and answers
What are Elliott waves in simple terms?
It is the idea that markets move in five waves with the trend and three waves of correction, reflecting swings in crowd mood.
What are the Elliott wave rules?
Wave 2 never goes below the start of wave 1, wave 3 is never the shortest, and wave 4 never enters wave 1's territory. Breaking any rule means the count is wrong.
Can you trade with Elliott waves alone?
It is risky: counts are subjective and change often. It is better to combine them with levels, market structure and a firm stop.
Related terms
Read next
The classic scenario: level, breakout, return, and a trade plan with entry, stop and target.
Read →How to read a candlestick chart: Japanese candles for beginnersCandlestick charts are the most popular way to look at price. Here is how one candle works, how to read them in a row, and the…
Read →EMAEMA (exponential moving average) is a line of the average price over N candles in which recent prices weigh more than…
Updated: 2026-10-19