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Thank you for interest in my learnings & knowledge. It took me a long time to discover and fine tune this process of what many in the trading world refer to as a "forbidden art". Education is like food and you must be hungry. If you're hungry you must look. The knowledge is there for anyone seeking to find it.
I have years of study in many different methods of technical analysis and packed as much of the meaningful stuff into this all-in-one education section. It may be comprehensive at times. Feel free to open the charts in separate windows to view as references when trying to learn the lessons. Or simply email or ask me anything!
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Stock charts that display the price of a stock plotted using a set period of time. This means that the chart only prints new bars when time changes.
Stock charts that display the price of a stock plotted using changes in price. This means that the chart only prints new bars when price changes.
Time charts include time and price. Price charts are strictly about price. Time charts should be used for timing trades while price charts should be used for finding price paths. Although you can plot targets and price paths using time charts it adds a lot of "noise". Below are two identical charts, one is price, one is time.
Technical Analysis. Elliott Wave Theory is a method of technical analysis which identifies price paths & projected targets by mapping out price in repeating cycles.
A mathematical phenomena. Fibonacci sequence is a sequence of numbers where each number is the sum of the two preceding numbers.
Fibonacci Sequence is closely related to the golden ratio of “1.618” & found in many settings from basic mathematics to biological life.
Regarding technical analysis for stocks, the golden ratio 1.618 is one of the most common measurements used. This ratio, along with other key numbers in the Fibonacci Sequence, will help identify everything from price targets to pullbacks thus making trading/investing opportunities visible.
Elliott Wave Theory can be simple to understand yet difficult to properly apply. Many skeptics often refer to this theory as “subjective” yet fail to explain how price pivots always seem to converge with Elliott Wave principle and Fibonacci Sequence. My goal is to make it cohesive and easy to apply but it still may need several reads before fully comprehending. Learning its uses can take much of the subjectivity out of the equation. Let's have a quick overview of EWT.
Back in the day (1930s), an accountant named Ralph Nelson Elliott created EWT with a goal of mapping out price paths on stock charts via patterns as it relates to investor/trader psychology. EWT Identifies “cycles” broken down into wave & corrective patterns which highlight the overall trend and is still used today. Principle and guideline for EWT is heavily based on the fundamentals of Fibonacci Sequence. Understanding Fibonacci Sequence means understanding that everything in life works in repeating cycles, Including the Stock Market...and Fibonacci Sequence gives a sort of roadmap where prices want to go.
EWT offers a comprehensive and efficient way to map out these "cycles" and expose price paths along with expected measured moves in price (meaning price moves all at once (aka price acceleration or markup)).
Next you will learn more about stock cycles along with the rules & guidelines that bind this method to glory. This will include wave structure & how to confirm your analysis with momentum as to identify the best pivots to BUY the dip or SELL the rip.
An interval of time during which a sequence of recurring events or phenomena is completed. For stocks, one basic cycle includes a 5 wave bullish or bearish sequence then 3 swings correcting the 5 wave move.
Fractal is a mathematical term for a shape with detailed structure that appears similar regardless of scale. In Elliott Wave Theory, each wave structure has a cycle within it.
*See illustrations below.
Because stock patterns are fractal. A Key example would be how 60 one minute candles compose a single hourly candle which is also just a part of a daily candle, etc. This is why best practice is to begin studies zoomed out, then zoom in. Fractal cycles use the same rules and principles as their parent cycles, so no matter how much you zoom in or out the patterns can look similar with similar parameters. Understanding the way this works provides key data for trades and investments.
"Identifying structure is crucial. This allows you to find the extreme areas where buyers and sellers agree on a price."
Basic EWT Rules
- Wave 2 cannot retrace more than 100% of wave 1.
- Wave 2 cannot be a triangle (but can be a part of it).
- Wave 3 cannot be the smallest between waves 1, 3, & 5.
- Waves 1, 3, & 5 can have extension cycles within them.
- Only 2 of the 3 bullish waves can extend in one cycle.
Advanced EWT Rules
- When wave 1 extends, the cycle completes at 61.8%-78.6% the length of wave 1 (from 2).
- Wave 2 Retracements: Typically 50%-61.8%, sometimes 38.2% (% of wave 1).
- Wave 2 can be any corrective pattern (not triangles).
- Wave 3 Targets: Usually extends past 100% the length of wave 1.
- 161.8% is the ideal target for wave 3.
- When wave 3 extends, it can reach 261.8%, 423.6%, or 685.4% the length of wave 1.
- Wave 4 Retracements: 23.6%-38.2%, sometimes 50%-61.8% (%of wave 3).
- Wave 4 and wave 1 generally do not overlap.
- Wave 4 can be any corrective pattern.
- When wave 2 is flat, wave 4 is usually deep and sharp.
- When wave 2 is deep, wave 4 is usually flat (triangle).
- Wave 5 Targets: When wave 5 extends price usually reaches 100% the length of wave 1. A standard wave 5 typically targets 38.2%-61.8% the length of waves 1+3 and can sometimes extend to 100% the length of waves 1+3.
The EWT sections below include illustrations and real examples of extended wave structures for each of the bullish waves (1, 3, & 5). Please view the ALL PATTERNS education section for rules on corrective patterns which should be used to map out corrective cycles 2 & 4.
When excessive sub-cycles occur within one cycle of the sequence.
Identifying that a wave extension is occurring or projecting that one has a high probability of occurring can offer extremely lucrative trades and investment opportunities. When a cycle extends it is always done in an impulse wave which is the strongest and steepest of price structures thus providing the largest gains. Waves 2 & 4 never overlap in an impulse wave.
Stock patterns are fractal. This means that when extension cycles occur, they will typically belong within their corresponding waves structure.
The illustrations of wave extensions show 3 degrees of cycles (parent/child cycles or fractal).
-Blue is notating the Grand Cycle.
-White is notating the Major Cycle.
-Smaller notations are notating the Minor cycle.
Extended Wave 1 generally begins with an impulse wave. Extended Wave 3s impulse wave is almost always within wave 3 of 3 and often either waves 1 or 5 as well. Extended Wave 5s impulse wave can most commonly be found within wave 5 of 5.
Always remember that only 2 of the 3 bullish waves are allowed to extend within one cycle.
Extended cycles often mirror their parent wave but can be in any combination (i.e. extended wave 1 structure within wave 3 & 5 when inside of a larger degree wave 1).
Excessive sub-cycles that occur within wave 1.
When wave 1 is extended, wave 3 usually reaches 61.8% the length of wave 1 while wave 5 reaches 78.6% the length of wave 1. When wave 1 is extended it is usually the largest wave in its cycle. As a rule wave 3 can never be the smallest. Therefore, when wave 1 is extended, then wave 5 is almost always the smallest between the 3 bullish waves in a cycle.
Extended wave 1 patterns can be found on all frames. It is a favorite for market makers when they want to move price quickly because it usually begins with an impulse wave within wave 1 of 1. Additionally, since stock patterns are fractal and repeat themselves, all bullish trends will eventually become extended wave 1 structures. This pattern is also easy to identify by its distinctive characteristics and structure shape.
When wave 1 is the largest, it is best practice to measure wave 3 against 5 to locate the price ceiling. If wave 3 is smaller than wave 1, wave 5 must be less than 100% of wave 3 since wave 3 can never be the smallest. Identifying the structure for wave 1 allows for future projected moves in waves 2 & 3 (view EWT rules).
In the example above $AMZN is showing an extended Grand Cycle Wave 1 structure from IPO. Price extended in sub-degree waves 1 & 3 within their parent Grand Wave 1. Since Grand Cycle Wave 1 was extended, the price target for the entire cycle (Grand Cycle Wave 5) is between 61.8%-78.6% the length of Grand Cycle Wave 1. Since wave 3 also extended, wave 5 CANNOT extend which is offering price acceleration towards the final price target with minimal pivots.
Excessive sub-cycles that occur within wave 3.
Wave 3 can never be the smallest of the 3 bullish waves. This means wave 3 almost always reaches more than 100% the length of wave 1. Extended wave 3s are the most commonly extended wave usually with an extended sequence within its wave 3 as well. The extended cycle often mirrors its parent. This means if the parent cycle is in a wave 3 then the sub cycle may extend within its 3rd wave too. These patterns often match but can also be any of the other extended combinations. When Wave 3 extends, price can reach 161.8%, 261.8%, 423.6%, or sometimes 685.4%+ the length of wave 1 before pulling back in wave 4.
Wave 3s are the most likely of the bullish waves for extensions to occur. Wave 3s are almost always the largest wave since it can NEVER be the smallest. Wave 3s are usually accompanied by bullish news and strong price movements in one direction with very shallow pullbacks or retracements. Since Wave 3 can never be the smallest along with its nature of rapid price movements, wave 3s are ideal for trading and investing for large gains, often in a short period of time relative to the degree of cycle (i.e. Grand, Major, Minor). When a wave 3 begins, it is almost always safe to assume that it will reach more than 100% the length of wave 1 with the only exception being when wave 1 is extended.
Identifying the wave 3 structures parameters allow for trades within wave 3 as well as the potential for wave 5 (in conjunction with wave 1)
In the example above $FICO is currently in a powerful Grand Cycle wave 3. I chose this chart because of the combinations of extended cycles used to compose the overall cycle pattern. Wave (1) of 3 was not extended which opens the doors for extensions later on. Wave (3) of 3 is a classic wave 3 extended cycle with (i) being small, extensions within 3 of (iii) and an extended wave 1 structure for wave (v) of (3). Since wave (1) was small, wave (5) can and is extending and has already broken above the classic target of 61.8% the length of waves (1)+(3) and just recently completed wave (iii) of (5) with the final wave (v) targeted to reach 100% of waves (1)+(3) (because wave (5) of 3 is also extending. Ideally wave 3s should reach 161.8% of wave 1 but when extended within wave 3, price can reach higher extensions within the Fibonacci Sequence, in this case it is the 423.6%.
Excessive sub-cycles that occur within wave 5.
Extended wave 5 structures usually reach 100% the length of waves 1+3.
Sometimes extended wave 5s can reach other extensions of 1+3 such as the 161.8% or 138.2%. Since wave 5s are in an ending sequence (wave 5), it is important to zoom out to the greater degree to determine what the greater price target is. There is usually a convergence of extensions between the greater & smaller degrees.
Identifying wave 5 structures can expose all sorts of data for traders and investors. Since wave 5s are last in a cycle, price can accelerate quickly if extending to reach a larger target or to create a capitulation moment. Wave 5 structures can also help a trader or investor know when to reduce or exit a trade knowing that the next wave in the greater degree will begin soon (i.e. retracements or 3 swing bounces during corrections). Any degree wave 5 can extend within its larger wave cycle as long as one of the two other bullish waves within that cycle has not already extended. Since wave 3 almost always extends, you must look whether wave 1 is extended. If wave 1 is extended it is safe to assume that wave 5 will not extend.
In the example above $CMG printed a very nice looking extended wave (5) structure to complete its first Grand Cycle. In this cycle price extended in wave 3 as well as wave 5. In wave (5) price structure extended within wave (v) accelerating right to the 100% target with minimal resistance in an extended wave 1 structure quickly completing in waves 3, 4 & 5. Remember that price can extend in a number of combinations. Even though it is extending in a wave (v) of (5) it extended in wave 1 of (v) of (5) of Grand Cycle Wave 1.
This take us full circle to the fractal concept where all cycles inevitably become extended wave 1 structures. Now that Chipotle stock has completed a Grand Cycle (accompanied by a new catalyst of CEO change) it is retracing for a Grand Cycle wave 2. Traders should look for the 61.8%-78.6% extension of $CMG Grand cycle wave 1 against 2 lows once it occurs to BTD & targets for Grand cycle wave 3...Since it is now an Extended Wave 1 structure.
Cycles will repeat in Bullish trends until price breaks below 100% of the largest wave 2 lows. This can create a bear market where all rules still apply. Only the direction of price changes, so instead of bullish cycles higher with corrections lower, it would be bearish cycles lower and corrections higher. This also applies to any stock that is in a major downtrend usually accompanied by bad fundamentals.
We're going to look at the cycles and apply the lessons above while hinting one more lesson on confirming trade setups.
For this trade we are spectating price action exiting an ABC "Zig Zag" correction down to $420. Price exits the zig zag pattern and bounces for a wave 1, then retraces 50%-61.8% for a higher low. This is an ideal wave 2 condition and a good spot for entry to swing or go long for wave 3. Since we're entering a wave 3, Price target 1 is 100% of wave 1, Price target 2 is 161.8% of wave 1. It is a best practice to take out the principal investment of your trade and even lock in some gains when first price target hits. Every trader has their tolerance for risk. Some traders may reduce their positions by whatever metric needed to create a risk free trade.
Since we bought the dip in wave 2 and rode wave 3 for a nice trade, we are now thinking to buy the dip in wave 4 to swing wave 5 higher. Wave 5 can offer a very profitable trade but wave 4s can be tricky so it's important to mitigate risk by reducing the size of the trade, setting stops, and waiting for support confirmations.
The first step is to identify the wave 4 structure and where to BTD (refer to "EWT rules" and "All Patterns" education sections). In this case, wave 4 was a zig zag that failed the 161.8% extensions, retraced 61.8% of wave 3, and found support above the peak of wave 1. The Target for this trade is 61.8% the length of waves 1+3. However, because wave 1 was not extended, it is possible for wave 5 to extend which would increase the potential target for wave 5 to reach 100% the length of waves 1+3.
Gains should be taken and the majority (to all) of your position should be closed when structure looks complete which happened just over the target 61.8% level. This is labeled "wave 1" of 5 (hand drawn in blue) because price eventually extended in wave 5. But at the time we wouldn't know this. At the time we would be labeling it wave 5 and is why we take gains here.
Price then appeared to make a higher low for a possible "wave 2" of 5. Confirmation occurred when price broke over wave 1. Now it's time to look for and BTD. In the next circle when price back tests the former target 61.8% level, dips can be bought and played to the 100% extension of waves 1+3 which is the target for wave 5 when wave 5 extends.
Below is a 4 hour $QQQ chart highlighting momentum divergences and extreme areas which can be used to confirm the major pivots in your Elliott Wave Theory analysis. In this case there were 3 major areas of opportunity where divergence or extreme converged with EWT analysis confirming that it is a highly probable success area to BUY the DIP. These are generally areas where buyers and sellers agree on a price. Finding these areas is the key to a successful trader or investor.
The rate of change in price plotted over a previous amount of time.
Identifying the momentum of a stock price can help traders and investors decide on strategy, entry & exit points, or whether to even take a trade. Traders & investors will typically look for divergences in momentum along with extreme areas both of which will offer clues on whether to BUY the DIP, SELL the RIP, or do nothing.
Momentum Divergences are when there is a discrepancy between momentum and price. There are bullish/positive divergences and bearish/negative divergences. The most common bullish divergence is when RSI makes a higher low while stock price makes a lower low. Momentum Divergences is one of the most effective ways to identify and confirm pivots. Identifying divergences is a skill worth mastering. Momentum Extremes is another effective way to locate and confirm pivots. There is a science to exposing extreme momentum areas which will be covered in the "Momentum Indicators Section".
Momentum Indicators used to expose divergences and extreme areas can include RSI, MACD, Stochastic, Volume, and many many more. Divergences & extremes can be found on any time or price frame. The longer the frame, the stronger the divergence or extreme area will be.
The momentum chart below highlights some of the signals momentum printed while correcting towards $420. The first extreme area reached on RSI & Stoch but did not break price oscillator. Bullish divergence formed (grey trendlines) but was met with a larger bearish divergence (lilac). Price reached extreme area at $420 when short and long length RSI reached extremes and printed a bullish divergence (green). Notice Price oscillator trend broke, then diverted on the next dip when short RSI reached extreme along with price meeting the trendline down. These are the ideal momentum conditions for a reversal and to go long.
"there are many ways to get to a destination. Walk, run, bike, car, etc. The same applies to trading and investing. It is the right way
when you're making money. it is the wrong way when you're not. Making money is the only thing that matters."
Indicators used to help traders & investors understand the strength of price trend by measuring the rate of change. Momentum is calculated over a set parameter of previous chart history which is why it is a lagging indicator. Momentum can be a very effective tool that has many uses such as identifying trend continuations or reversals.
The most popular momentum indicator is "Relative Strength Index" or "RSI". Other popular momentum indicators include MACD, Stochastics, Price Oscillators, Moving Averages, CCI, MOM, ADX, and more.
For now, I will cover my favorite and most used momentum indicators needed to understand the Elliott Wave Theory learning section. The indicators currently included in this section are Relative Strength Index (RSI), Moving Averages, Stochastic RSI, and Price Oscillator. We will deep dive what each indictor does, represents, and its uses. There will also be information on how to tweak each indicator to your preference along with how I have them set. In the future I will cover more indicators I use such as Volume Profile, MACD, and many more.
$SPY Daily chart highlighting a layered short 3 period & long 15 period RSI
with 83/17 overbought/oversold levels using a Wilders/OHLC4 calculation.
Relative Strength Index (AKA "RSI") measures the speed of price changes and rates this strength between 0-100.
Traders and investors use RSI to help determine and identify trend strength for potential continuations or reversals along with extreme areas to expose entry and exit opportunities. The RSI indicator by default displays a smooth line moving between 0-100. In the simplest terms, when RSI>70 the (time/price)frame may be considered overbought and in reverse, RSI<30 would generally be considered oversold. However simple as that sounds, reading stock charts is not always a simple task. RSI is a powerful tool when used together with other metrics such as Moving Averages and/or EWT as examples. RSI (like anything that has system defaults) can be tweaked in many different ways. If a trader or investor know what they're looking for, then altering settings or being creative can offer great insight. Under the right settings, RSI can be very reliable for exposing divergences between momentum and price. This is another reason why RSI is a important tool. Lets look at a few ways to enhance RSI.
The settings for RSI can take a basic indicator and turn it into gold. The 3 images on the right show a basic RSI indicator, final adjustments, & updated RSI using short and long length RSI to expose the true areas of opportunity. I prefer to set Price to (O+H+L+C)/4 to broaden the range & the Average Type set to "Wilders" which is slower to respond to price than "simple" or "exponential" to ensure solid confirmations.
Note how long RSI remained overbought in the default settings Image above highlighted in a large red box. Then note how when using the customized RSI in the image below showed the exact area when to sell or exit longs. That is because (IMO) true RSI overbought/oversold values should be set to 83/17, not 70/30. Additionally, one length for RSI is not enough. By default, systems set RSI to 14 period Length. I prefer to layer two RSI indicators, one with a 15 period (long) length and the other with a 3 period (short) length. This puts a spotlight on divergences not only between momentum and price but between short and long periods. RSI with customizations will almost always produce clearer and more accurate signals.
$SPY Daily chart with a 9-Day-Exponential Moving Average
& 20, 50, 200-Day-Simple Moving Averages.
Moving Averages calculates the price over a set period of time and displays a smooth line on the chart indicating the average price over that set period of time.
The Moving Averages stock indicator is one of the most widely used indicators in technical analysis. Technical analysis using moving averages usually incorporates a combination of averages used over a range of history based on the time/price-frame. For example, analysts will include 20, 50, & 200 period moving average for a daily chart study to show data that includes 3 average prices of the previous 20, 50, & 200 daily sessions. The number of periods should relate to the frame, meaning a 200 period daily average may have more meaningful near term impact than a 200 period monthly average whereas a 10 period monthly average may be more significant than a 10 period daily average. Analysts look at the interactions between different length MAs across frames along with their respective levels for exposing buy or sell opportunities. MAs can offer insight on trend strength, support or resistance levels, continuations, and reversals. Because moving averages is a lagging indicator (shows avg of previous prices) traders and investors will use MAs along with other indicators like Momentum and leading indicators such as sector divergences, company fundamentals, and Elliott Wave Theory to confirm their thesis. Generally it is bullish when price is trading above all MAs while shorter MAs are moving above the longer MAs. Generally, it is bearish under reverse conditions or when longer MAs fail during an uptrend.
The images below illustrates 3 different ways that moving averages can be used. The first image demonstrates a bullish "Golden Cross" which is an example trade to look for a buy opportunity once the 50 MA crosses above the 200 MA. A bearish "Death Cross" is the opposite moving average cross. Generally speaking, the signals are stronger and more reliable the longer the time/price frame. The second image illustrates one key component for a "Cup & Handle" stock pattern which is that the 50 MA should be moving through the middle of the cup. Cup and handles target 100% the length of the Cup from Handle and offered amazing returns for traders who bought the MA200 or even the MA50 support. The third example is an intraday chart showing trade opportunities from longer length MA support found and exit opportunities when shorter length MA support fails and crosses below the longer length MA.
Simple (SMA), Exponential (EMA), & Weighted (WMA), moving averages are just a few examples available in most trading platforms. Traders will most often view SMA which is considered more of a long term average since it is calculated smoothly across the plotted period. MAs such as EMA & WMA are influenced greater by recent price (vs longer price across the plotted period length) and can highlight a more near term perspective of price.
Traders generally use a mixed bag of moving averages that cater to their trading style.
$SPY Daily chart Stochastic RSI with 83/17 overbought/oversold levels,
7 period length, & OHLC/4 Wilders calculation.
Stochastic is a well known oscillator that measures two plots between a specific price over a set period. Highly regarded as a reliable tool, stochastic is very similar to RSI yet has some key differences. RSI measures speed of the rate of price change over a set period of time, whereas Stochastic measures the range of closing price over a set period of time making it more sensitive to fluctuation and print more signals than RSI. Stochastic RSI measures RSI over a set period of time.
Stochastic is widely used in choppy markets due to its price based formula which can be effective during volatile price swings. RSI is known to be more effective in trending markets. Stochastic RSI is a hybrid that can be effective in all markets. Stochastic RSI's most common use is for confirming near/mid term entry and exit areas and reversals. In simple terms, when the two stochastic plot lines cross while overbought or oversold and then exits back into 17-83 would signal for a trade. However, stochastic can stay in overbought/sold zone once it enters or quickly divert and re-enter overbought/sold zones during bullish and bearish cycles. Traders typically look at StochRSI as additional confirmation with other technical analysis. It should not be used alone.
I added a line which separates the first half of the settings that calculates the RSI formula. The second half calculates the stochastic. Since I am looking for near/mid term signals to compliment my other indicators, I have RSI set to a Medium length and stochastic set to shorter lengths.
$SPY Daily chart highlighting a positive (bullish) divergence on the Price Oscillator.
The Price Oscillator measures the difference between two moving averages over a median of 0. Above 0 is bullish while below 0 is bearish.
General uses for the Price Oscillator are for determining trend strength along with areas of divergence between oscillator and price. My particular use of Price Oscillator is for identifying larger degree cycle pivots on longer timeframes and intraday trend strength for swings on a 4 hour timeframe.
Since I am looking for Major pivots using Price Oscillator, I have it set to simple moving average and mostly longer lengths. I encourage you to explore your favorite indicators settings and compare the differences on the charts to gain more experience and find what works for you.
An impulse wave is pattern when price moves swiftly towards its cycle target. Impulse waves are found within cycles when waves extend. Within an impulse sequence wave 3 tends to reach beyond 161.8% of wave 1 and the wave 4 never overlaps with the peak of wave 1. Impulse waves generally form within the parameters of the extension cycle and is a strong signal for technical analysis. (See EWT Rules Section)
Diagonals are a commonly found pattern and considered very reliable when calculated within the parameters of a diagonal. Traders often refer to diagonals as a falling or rising wedge pattern. Understanding when and where these patterns print along with their parameters can offer trade opportunities and a larger perspective on near-mid term price paths.
There are two types of diagonal structures. One that is corrective (3,3,3,3,3), and one that is impulsive (5,3,5,3,5). Either version
-Diagonals can be a leading or ending 5 wave sequence therefore cannot be a wave 3 to its entirety.
-Waves 2 & 4 generally overlap (not a rule but is common and a main characteristic of diagonals.
-Elliott Wave Rules apply (i.e. wave 3 cannot be the shortest, etc.)
-Diagonals can be contracting (usual) or expending (unusual).
-When contracting, wave 3 is usually extended. When expanding, wave 5 is usually extended.
-The end of a diagonal cannot exceed the apex of the contracting trendlines.
-Leading diagonals often occur at the onset of a correction
-It is common for price to overshoot the trendlines on pivots, then return to the inside of a diagonal channel.
$NVDA Max chart highlighting multiple Zig Zag patterns.
The Zig Zag corrective pattern is a 5,3,5 move and one of the most commonly found patterns in stock charts. Zig Zags are powerful patterns that print on all time/price frames and offers a lot of important data for traders. Whether scalping, swinging, or looking for a longer trade, zig zags usually offer insight to one or all three types of trading opportunities.
Zig Zags are typically composed of 5 waves for "A", 3 swings for "B", & 5 waves for "C". The most common target for wave "C" is 100% the length of wave "A" from "B". Wave A & C must be 5 waves, wave B can be any corrective structure (i.e. zig zag, triangle, or combination). 100%-161.8% the length of A for C is the general target for corrective zig zags but can sometimes extend to the 261.8% extension.
Flats are a 3,3,5 structure correction common in sideways markets and one sided trends. Waves A & B can be any 3 swing corrective structure, wave C must be 5 waves. Wave B generally retraces most of wave A. Target for wave C is generally 100% the length of wave A but can also be 61.8% or 123.6%. Wave C in flat corrections should not reach 161.8%.
Expanded flats are 3,3,5 structure are sometimes found in tricky corrections during strong bullish or bearish trends. Waves A & B can be any 3 swing corrective structure, wave C must be 5 waves. Wave B ends 100%+ the length of A, typically 123.6% but never more than 140%. Wave C ends 100%-161.8% the length of wave A.
Running flats are similar to but rarer than expanded flats. When this pattern does print, it's usually a wave 2 leading into a strong wave 3 (hence the short wave C). Waves A & B can be any 3 swing corrective structure, wave C must be 5 waves. Wave B ends 100%+ the length of A, typically 123.6% but never more than 140%. Wave C ends 61.8%-100% the length of wave A.
$MSFT - expanded flat 3,3,5 structure
After a 5 wave advance $MSFT stock pulls back for wave 2 in a expanded flat 3,3,5 structure.
*Note how the expanded flat target aligns with EWT rules for a wave 2 retracement.
Triangles are a consolidating 3,3,3,3,3 configuration and can only be found in wave 4 and wave B structures. Identifying triangles can offer near term trade opportunities along with a greater perspective of the parent pattern whether it be part of a corrective (wave B) structure or part of an impulsive (wave 4) structure.
-Triangles only appear in Wave 4s & Wave Bs.
-Composed by 5 connecting Zig Zag family corrections within a consolidating channel.
-Wave A must be a zig zag or flat.
-Wave B must be in the Zig Zag corrective family.
-Wave C can be any corrective combination except triangles (i.e. zig zag family or WXY).
-Wave D can be any corrective combination except triangles.
-Wave E can be a zig zag or a triangle. When in expanding triangle, wave E is always a Zig Zag.
$AAPL - WXY corrective combination for wave 2
Corrections often connect 2 or more corrective patterns together. When this happens it is labelled WXY.
W = Corrective Pattern 1
X = Connector (Pattern 2)
Y = Corrective Pattern 3
WXY Patterns may print when there is uncertainty in the marketplace
and/or when specific retracement levels have not been met.
-Wave W can be any zig zag family pattern or a WXY itself.
-Wave X can be any corrective pattern and typically retraces 50%-61.8% of W.
-Wave Y must be a Zig Zag and targets 61.8%, 100%, or 123.8% the length of wave W
-Wave Y CANNOT reach 161.8% of Wave W (or it's not a WXY).
Fibonacci extension & Retracement tools.
Fibonacci Retracement & Extension tools are used for measuring structure, projecting pullbacks, & projecting future price targets. Understanding its uses and how to correctly draw Fibonacci is crucial for calculating accurate technical analysis.
Fibonacci Extensions consists of 3 points. A beginning, middle, and end. Drawing Fibonacci Extensions measures the distance between the first 2 points from the 3rd point.
Key Extensions should include Fibonacci Sequence numbers 61.8%, 100%, 161.8%, 261.8%, 423.6% & 685.4% along with key ratios like 38.2%, 78.6% and 123.6%. It is best practice to code them for their various purposes.
Fibonacci Extension points should be set at pattern ending pivots. Meaning the extensions for most triangles & flats should be drawn at the end of pattern, even though price is at a higher low (bullish) or lower high (bearish) when the pattern ends (see "Extensions of a wave B triangle" image).
Fibonacci Retracements Measure the distance between two points. Key Fibonacci levels should include 0%, 14.6%, 23.6%, 38.2%, 50%, 61.8%, 78.6%, 85.4%, 100%, 123.6%, & 140%.
*There are many ways to success and many strategies using different fib ratios. The Fibonacci extension and retracement levels mentioned above are the ones I use. I only keep visible the ones necessary for the characteristics of the pattern. For example, during wave 2 pullbacks I may only keep the 38.2, 50, and 61.8% levels visible.
Identifying the correct pivots will help you draw Fibonacci tools accurately. Measuring from the wrong pivot can cause an error in projection and result in lost profit. This is why it's imperative to double and triple check your work. Review your thesis and consider alternate possibilities. Confirm your thesis from multiple data points. Although it may be safe at times to scalp using Fibonacci alone, it is not advised and eventually will not work. Using Fibonacci tools along with EWT will identify the characteristics of the sequence cycle count thus exposing what fib levels should be expected (i.e. close a trade at 61.8% extension vs 161.8% because there is no EWT analysis or the EWT study has errors).