Elliot waves price characteristics and objectives
The various waves have different probable objectives. The analyst's goal is to search for price zones in which one has to obey oneself. These zones become particularly important levels to be used both as entry points and as exit points (target price).
Wave 1 generally begins with a sharp reversal of the trend.
Wave 2 generally retraces wave 1 by 50% or 62%.
Wave 3 is often characterized by the presence of gaps and the volume is always very strong. Wave three, in general, is 162% long, or 175% or 262% of wave 1.
Wave 4 is a corrective wave, where traders make a profit. At this stage there are many false faults, also due to the low presence of volumes. This wave retraces wave 3 generally by 30% / 50%.
Wave 5 is the last attempt to continue the trend. This last wave is 62% long, or 100%, or 162% of wave 1.
In order to know when we are at the end of the 5 wave cycle, we can use this simple calculation.
Example for an upward trend:
- We calculate the length between the zero point and the end of the wave 3, after which I add this length to the minimum of the wave number 4, obtaining the target A for wave 5.
- We calculate the length between the zero point and the end of the wave 3 and multiply it by 0.62. I add what was obtained number with wave 4 obtaining the target B of wave 5.
The area between points A and B is an area where wave 5 is most likely to end its course.
The numbers we used as multipliers (0.62; 1.62 etc) are numbers extrapolated from the Fibonacci numerical series.
How to recognize Elliot Waves with MACD indicator
Bill Williams and Tom Joseph have created a method to recognize the different waves, through the use of a well-known technical analysis indicator, the MACD.
These gentlemen have discovered that, on wave 3, the indicator produces the maximum extension of the histogram, on wave 4 it reaches and exceeds the zero line and, on wave 5, the indicator does not exceed the height that had in conjunction with wave 3.