Any wave has a degree. The degree is the position of the wave in relation to other waves, viz:
Р. Elliott named nine degrees, ranging from the smallest, which can be seen on the hour chart, to the largest, the hypothesis of the existence of which was put forward by the author on the basis of the data available at the time.
Elliott gave nine degrees, ranging from greater to lesser, to make it easier for wave analysts to exchange information:
According to this classification:
Such classification is not mandatory, but in everyday practice it is used by almost all wave analysts, which is why it is generally accepted.
When marking waves on the chart, it is important to have a certain scheme at hand, which will allow to distinguish the degrees of waves in the market progression. Below is a table with a standard sequence of designations.
These names and designations are applied in a special way when identifying the degrees of waves. Using this classification, the analyst will be able to determine the position of the wave in the context of the general market movement, just as the latitude and longitude are necessary to determine the geographical location.
The progression is infinite in two directions, so the standard notation table is based on easy-to-remember repetitions. Driving waves on the chart are indicated by alternating triads of Roman and Arabic numerals. Correction waves are marked as alternating triads of uppercase and lowercase letters.
Waves can also be referred to by their degree number. The greatest degree of progress, which dates back to ancient times, is the zero degree or as it is also called epochal degree, which is why it is important to use them in analytics. The preferred designation is 11, 12. This standard makes quicker visual orientation possible. At the moment, due to the development of computer technology and the very high speed of transmission of images through the Internet, this method of notation of waves has practically ceased to be used.
It should be taken into account that the names and designations refer to certain identifiable waves. The analyst with the help of nomenclature will be able to pinpoint the position of a wave in the progression, comparable to how with knowledge of longitude and latitude one determines the location of an object.
You have already learned that each wave has a degree. However, at the starting point of a wave’s progression, determining its degree is a very difficult task. To determine the degree of a wave, we must focus not on the price or the time period, but on its shape, which is a function of price and time. There is a positive momentum, too – the accuracy of determining the degree of a wave cannot affect the quality of market forecasting, if only because it is necessary to understand the entire picture, rather than its separate fragments. Awareness and understanding of the approaching big movement of quotations on the stock market is much more valuable than the correctness of its name.
Each of the waves is designed to perform one of two important functions – action or opposition. That is, one wave is capable of either continuing the movement of a larger wave, or opposing this movement. The function can be determined by the relative direction.
An acting wave is any wave moving in the identical direction as the wave one degree higher that is part of it.
A counteracting wave is any wave that is moving in the opposite direction as the wave one degree above, which is its constituent part.
The different terms (driving and acting waves, corrective and counteracting waves) came about because of the presence of different directions of movement. If there were one trend direction, the need to introduce additional terms immediately disappeared.
Thus, any of the counteracting waves develops along the corrective type, i.e. counteracting waves always have a 3-wave structure or one of its variations.
Most of the acting waves consist of five sub-waves. But in some cases, they develop according to the correctional type, that is, they consist of three waves or their variations. In other words, counteracting waves always consist of corrective waves. Acting waves, on the other hand, may be either driving or corrective waves.
Understanding the structure is important to be able to distinguish the functions and types of waves. This concept is not fully but sufficiently depicted in Figures 1.1-1.4. Understanding these models will also lead to an understanding of all the terms.
The use of the Wave Principle in practice could not cause any problems if the basic structure described the behavior of the market in full. The reality, unfortunately or fortunately, is much more complicated. The cyclicality takes place both in an ordinary human life, and on the fund market. Cyclicity is usually understood as a precise repetitiveness, whereas the Wave Theory allows for a rather vast variability. In fact, Elliott sought to accurately and fully describe the most likely behavior of stock markets under certain circumstances, and he fully succeeded in doing so.
There are a number of well-known variations of the basic model, which have been described and demonstrated by the author in details. An important feature has also been noted, which is that each model has systematizable requirements and some inclinations to develop. On the basis of these observations, the author further formulated certain rules and norms, thanks to which today it is possible to correctly identify waves. It is extremely important to have a thorough understanding of the rules and norms in the smallest details in order to understand how the stock market can behave and how it cannot behave, which is not unimportant. Below we will talk about the main aspects of the Wave Principle. It is desirable to know them for every analyst who wants to understand the peculiarities of the market behavior.
Let us briefly outline the main technical aspects of the theory:
Sources: by J. Frost and R. Prekter: “Elliott Wave Principle. The Key to Market Behavior” 2005