Before going to study Elliot wave, let's see what is support & resistance.
Support & resistance - You might have well observed that the stock price doesn't increase or decrease linearly but crests & troughs are made at regular intervals.
There is certain stock price below which stock price doesn't go for a certain period of time. This is called support level.
This is the stock price at which huge amount of buying happens & bulls control the downward movement of stock price. Buyers becomes confident about that certain value of stock price.
Similarly there is certain value of stock price above which stock price can't go over a certain period. This is called resistance level.
Now buyers are not confident about the price huge amount of selling occurs .Here bears come into play & stock price gets resistance to go above that particular level.These support & resistance levels yields opportunities to trade ('entry & exit')
The propagation of stock price from support level to resistance level is called uptrend, &
The propagation of stock price from resistance level to support level is called downtrend.
When resistance level is broken by a stock & proceeds above then the same resistance level acts as support level for the stock.
Elliott wave theory
The theory is named after the inventor Ralph Nelson Elliot. He studied past 75 years stock market data & came to some conclusion which he put into theory called Elliott wave theory.
Elliott wave theory depends on the assumption that whatever chart pattern made by stock or index over a larger time frame is sames the chart pattern made over a smaller time frame.
According to Elliott, the chart pattern made over multi-centuries (called grand supercycle),is same as the chart pattern over 40 to 70 years ( called 'super cycle'), is same as chart pattern over one to many years ( called 'cycle' ),is same over few months to couple of years ( called 'primary'), is same over few weeks to some months ( called 'intermediate) ,is same over some weeks ( called 'minor'), is same over some days ( called 'minute'), is same over some hours ( called' minutte'), & is same over minutes ( called 'sub - minutte').
Elliot wave pattern consists of 'impulsive wave' & 'corrective wave'.
Impulsive wave consists of 5 sub-wave's & corrective waves consists of 3 sub-waves, total 8 waves in a cycle.
In the above figure the sub-waves 1,2,3,4 & 5 completes a larger' impulsive wave' while the sub-waves a, b & c completes 'corrective wave'.
As stated by Elliott, this pattern still consists of sub waves.
Impulsive wave 1,3,5 & also ' a & c' (because these sub-waves are impulse waves of correction pattern), consists of 5 sub-waves & the corrective waves 2,4 & also' b' ( because this is corrective wave in downward movement) consists of 3 waves.
Hence the figure is modified as below.
Elliott wave pattern is also formed in downtrend.
Sub-waves 1,2,3,4,5 are part of 'impulsive wave' while sub-waves a, b, c form corrective wave.'
Sub-waves 1,3,5 coupled with 'a & c' consists of impulsive wave within while sub-wave 2,4 coupled with 'b' consists of corrective waves within as shown below.
Pre-requisite for Elliott wave -
Any wave to be treated as Elliot wave must fulfill the following three conditions,
1. Wave 2 should not retrace back more than or equal to 100% of sub-wave 1.
2. Wave 4 should not retrace back more than or equal to 100% of sub-wave 3.
3. Wave 3 should exceed peak of wave 1 & should be longest of all 5 waves.
The lengths of sub-waves is determined by Fibonacci.
*Fibonacci & Elliot wave -
*Fibonacci sequence -
Fibonacci sequence is set of numbers that starts with two natural numbers 0 & 1. The every next number called Fibonacci number is calculated by adding the previous two numbers. The sequence so formed is called Fibonacci sequence.
Thus the next number after 0,1 is 0+1=1 & the series becomes
0,1,1.
The next Fibonacci number is calculated by adding the previous two numbers that is 1+1=2
Then the sequence bbecome
0,1,1,2
If we go on calculating like this the sequence becomes
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144.........
This is called Fibonacci sequence.
Excluding some first numbers in the sequence if we divide any number by the next number the ratio is approximately .618 (called golden ratio) that is 61.8% .
Excluding some first numbers in the sequence if we divide any number by the second right number the approximately comes .382 which is 38.2%.
Excluding some first numbers if we divide any number by third right number the ratio approximately comes .236 which is 23.6%.
The golden ratio .618 is found in nature in so many places like galaxy formation, sunflower seed array etc. Hence the area of interest whether these ratios can be applied in stock market.
Elliott wave on it's own doesn't give buy or sell signals unless coupled with any indicator, still by Fibonacci ratios, approximate support & resistance levels can be calculated.
These levels can be used for entry, stop-loss or exit by using the Fibonacci ratios 23.6% ,38.2%, 61.8% & 78.6% to the previous moves.
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Support & resistance - You might have well observed that the stock price doesn't increase or decrease linearly but crests & troughs are made at regular intervals.
There is certain stock price below which stock price doesn't go for a certain period of time. This is called support level.
This is the stock price at which huge amount of buying happens & bulls control the downward movement of stock price. Buyers becomes confident about that certain value of stock price.
Similarly there is certain value of stock price above which stock price can't go over a certain period. This is called resistance level.
Now buyers are not confident about the price huge amount of selling occurs .Here bears come into play & stock price gets resistance to go above that particular level.These support & resistance levels yields opportunities to trade ('entry & exit')
The propagation of stock price from support level to resistance level is called uptrend, &
The propagation of stock price from resistance level to support level is called downtrend.
When resistance level is broken by a stock & proceeds above then the same resistance level acts as support level for the stock.
Elliott wave theory
The theory is named after the inventor Ralph Nelson Elliot. He studied past 75 years stock market data & came to some conclusion which he put into theory called Elliott wave theory.
Elliott wave theory depends on the assumption that whatever chart pattern made by stock or index over a larger time frame is sames the chart pattern made over a smaller time frame.
According to Elliott, the chart pattern made over multi-centuries (called grand supercycle),is same as the chart pattern over 40 to 70 years ( called 'super cycle'), is same as chart pattern over one to many years ( called 'cycle' ),is same over few months to couple of years ( called 'primary'), is same over few weeks to some months ( called 'intermediate) ,is same over some weeks ( called 'minor'), is same over some days ( called 'minute'), is same over some hours ( called' minutte'), & is same over minutes ( called 'sub - minutte').
Elliot wave pattern consists of 'impulsive wave' & 'corrective wave'.
Impulsive wave consists of 5 sub-wave's & corrective waves consists of 3 sub-waves, total 8 waves in a cycle.
1-2-3-4-5 impulsive wave &
A-B-C corrective wave
As stated by Elliott, this pattern still consists of sub waves.
Impulsive wave 1,3,5 & also ' a & c' (because these sub-waves are impulse waves of correction pattern), consists of 5 sub-waves & the corrective waves 2,4 & also' b' ( because this is corrective wave in downward movement) consists of 3 waves.
Hence the figure is modified as below.
Elliot wave 1-2-3-4-5-A-B-C
Showing internal waves
Elliot wave 1-2-3-4-5-a-b-c in downtrend
Sub-waves 1,3,5 coupled with 'a & c' consists of impulsive wave within while sub-wave 2,4 coupled with 'b' consists of corrective waves within as shown below.
1-3-5 & a-c impulsive wave while
2-4 & b corrective wave
Any wave to be treated as Elliot wave must fulfill the following three conditions,
1. Wave 2 should not retrace back more than or equal to 100% of sub-wave 1.
2. Wave 4 should not retrace back more than or equal to 100% of sub-wave 3.
3. Wave 3 should exceed peak of wave 1 & should be longest of all 5 waves.
Elliot wave corrected by Fibonacci
*Fibonacci & Elliot wave -
*Fibonacci sequence -
Fibonacci sequence is set of numbers that starts with two natural numbers 0 & 1. The every next number called Fibonacci number is calculated by adding the previous two numbers. The sequence so formed is called Fibonacci sequence.
Thus the next number after 0,1 is 0+1=1 & the series becomes
0,1,1.
The next Fibonacci number is calculated by adding the previous two numbers that is 1+1=2
Then the sequence bbecome
0,1,1,2
If we go on calculating like this the sequence becomes
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144.........
This is called Fibonacci sequence.
Excluding some first numbers in the sequence if we divide any number by the next number the ratio is approximately .618 (called golden ratio) that is 61.8% .
Excluding some first numbers in the sequence if we divide any number by the second right number the approximately comes .382 which is 38.2%.
Excluding some first numbers if we divide any number by third right number the ratio approximately comes .236 which is 23.6%.
The golden ratio .618 is found in nature in so many places like galaxy formation, sunflower seed array etc. Hence the area of interest whether these ratios can be applied in stock market.
Elliott wave on it's own doesn't give buy or sell signals unless coupled with any indicator, still by Fibonacci ratios, approximate support & resistance levels can be calculated.
These levels can be used for entry, stop-loss or exit by using the Fibonacci ratios 23.6% ,38.2%, 61.8% & 78.6% to the previous moves.
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I am new here still I got the idea
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