Motive waves consist of five sub-waves and are always directed in the direction of the trend to a higher degree unit. Motive waves are quite easy to recognize on the chart.
In moving waves, the following rules are observed:
- Wave 2 each time returns less than 100% of wave 1 (that is, wave 2 does not go beyond the beginning of wave 1);
- Wave 4 returns less than 100% of wave 3 every time;
- Wave 3 each time goes beyond the end of wave 1.
The purpose of any trend wave is the development of this trend. The above-described rules for the formation of the trend wave structure guarantee that this will actually happen.
In this structure, the author of the theory noted that wave (3) is usually the longest among the others, and is not the shortest among the three waves (1, 3, and 5) that are functioning. This rule will be true as long as wave (3) has the largest percentage of movement on the percentage scale against the other waves (1, 5).
There are two types of moving waves: impulses and diagonals.
An impulse is the most common driving wave in practice. Moreover, when considered in detail, all models of wave analysis can be decomposed into impulses.
In an impulse, wave 4 cannot end in the price territory of wave 1. This rule applies to all collateral-free money markets. Futures markets are capable of causing short-term price extremes whose origins do not occur in spot markets due to the presence of extreme leverage.
The overlaps are rare exceptions if they occur in practice. Most often they occur in intraday price changes. On higher timeframes they practically do not occur. In addition, the active sub-waves (1, 3, and 5) of an impulse are nothing more than moving waves, and the sub-wave 3 is always an impulse.
As mentioned before, there is only one way to determine a pulse: check to see if all the rules are being followed. You should not ignore the rules. There have only been two instances in the theory author’s long career where a combination of all the other rules and regulations has led to the idea that a particular rule has been violated. Analysts who neglect the above norms, preferring to form a completely different approach to analysis, often still turn to the Wave Principle after a while. These rules and norms are of great practical value for making correct calculations.
In many pulses there is a significant increase in the length of one active wave (wave 1, 3 or 5). Elliott called this phenomenon stretching. Most often stretching is found in wave 3 or wave 5 of the pulse. Stretching of the first impulse wave is very rare in practice.
Sometimes there are cases when it is impossible to clearly determine which wave is stretched. This is not particularly fundamental, since in the Elliott system, the sequences of nine and five waves have identical meanings.
The variants of impulse wave stretching are clearly illustrated in Fig. 1.7.
The author of the theory used the word “failure,” which best describes a situation in which the fifth wave does not go beyond the end of the third wave. However, many experts use another term, “truncation” or “truncated fifth. This word better conveys the meaning of the situation. As a rule, truncation is confirmed by the assumed fifth wave with five sub-waves, as shown in Figure 1.11 and Figure 1.12. Truncation usually occurs due to a strong third wave.
Since 1932, the history of the market on large degrees knew only two cases of truncated fifths. One of these cases was recorded in the Cuban crisis (Fig. 1.13). It followed immediately after the crash, which happened as wave 3.
Another such case was recorded in late 1976 (Fig. 1.14). It followed a broad wave (3) that developed rapidly between 1975 and 1976.
Diagonal is another driving model of the Wave Analysis. Its main difference from an impulse is the presence of its characteristic features of a corrective model. In the case of a diagonal, as with an impulse, the counteracting sub-wave does not reach the beginning of the last active sub-wave, and the third sub-wave cannot be the shortest.
- A diagonal is just one five-wave structure in the direction of the main trend, distinguished by the following features:
- Wave 4 always enters the price territory of wave 1, this phenomenon is called “self-intersection”;
most of the diagonals are characterized by a fading amplitude of movement, which is reflected in the relations of waves (1 > 3 > 5 and 2 > 4). Such diagonals are called tapering diagonals.
Sometimes the wave ends with truncation, but in practice this phenomenon is rare, and if it occurs, it is usually truncated by a minimum value. This pattern can be seen only in some parts of the structure.
Find a Ending diagonal in the fifth wave of momentum, in the C wave of the single zigzag, and in the C wave of the plane.
Р. Elliott formulated the following idea characterizing a endind diagonal: “the previous movement is already far away and is going too fast”. In all cases known in practice, the ending diagonal appears in the final wave of the larger model, which characterizes the actual end of a larger movement. The diagonal, which narrows, takes the form of a wedge with two converging lines bounding it. The most common form of end diagonals is shown in Fig.1.15 and Fig.1.16 in the most frequent position within a larger impulse wave.
The author discovered only a single case of divergence of the bounding waves, thus forming not a tapering but an expanding diagonal. But for analytics, this model is not suitable in the best way.
The finite diagonal was encountered in small, minute, and minute waves between 1976 and 1978. Figure 1.17 and Figure 1.18 show two periods, one of which shows an upward direction and the other a downward direction.
(The author made a mistake in Fig. 1.18: the tapering end diagonal was placed in violation of two known rules – wave 4 does not enter the price range of wave 2, and wave 1 is the shortest among the acting waves).
Fig. 1.19 shows the permissible expanding diagonal. We draw your attention to the probable change in direction immediately following the diagonal.
Stretching waves, truncations, and finite diagonals will tell you about the coming dramatic event. It happens that at certain turning points in waves of different degrees, two phenomena appear at once, combining forces to move in the opposite direction.
Not so long ago, it became obvious to analysts that a periodic diagonal appears in wave 1 of the impulse and in wave zigzag A. Such diagonals are called initial diagonals. The initial diagonals found had an internal structure of 3-3-3-3-3, and this despite the fact that in two cases they could be placed according to the principle of 5-3-5-3-5. All this made it possible to come to another obvious conclusion.
The analyst should be aware of the possibilities of such a model. It is especially important, because there is a possibility of confusing it with a much more common phenomenon – a series of first and second waves (Fig. 1.8). The primary diagonal in the first wave is followed by a deep correction.
Figures 1.20 and 1.21 illustrate the initial diagonals from real life. The initial diagonal is also capable of having an expanding shape. This shape usually appears at the beginning of the fall in the stock market. This model was not known to Elliott, but it appeared so often and for a long period of time, so there was enough reason to mention it.
The main advantage of the Elliott Wave Theory is the formation of identical structures both in descending and ascending trends. The structure of the trend is in no way tied to the time frame, so the intervals do not affect the process of wave formation.
Sources: by J. Frost & R. Prekter, “Elliott Wave Principle. The Key to Market Behavior” 2005