What are the Rules of Elliott wave Theory?

This is the Second article in our Elliott wave learning series which is a price action based technical analysis methods.

Rules of Elliott Wave Theory:

We already explained about Elliott wave cycle. Now it is the right time to know about the rules of elliott wave theory which are the heart of Elliott wave theory. These are as follows:

1. Wave 2 can never correct more that 100% of wave 1 i.e. wave 2 never break below the starting point of wave 1.
2. Wave 3 can never be the shortest of wave 1, 3, 5.
3. Wave 4 can never break below the end point of wave 1 i.e. wave 1 and 4 cannot overlap. There is an exception to this rule which will be discussed in later articles.

Beside these three rules there are two more mandatory rules:

Rules of alternation for Extension:

At least one of wave 3 or wave 5 must be extended. That means either wave 3 or wave 5 must be extended. Also both may be extended. Please note here there is a misconception that both wave 3 and 5 can’t be extended simultaneously.

Rules of Alteration for Correction:

Wave 2 and 4 cannot be similar type correction that means if one is simple correction then other must be complex or irregular correction.

These two rules of alternation will be discussed in detail in later articles and also there are many other rules which we shall cover later.

Also read other topic covered under our free Elliott wave theory course :

1. Concept of Elliot Wave Theory- Wave cycle
2. Rules of Elliott wave Theory
3. Fibonacci Ratio.
4. Component of EWT
5. Elliott Wave Personality
6. Application of fib ratio in EWT
7. Elliot wave patterns
8. Different Patterns in EWT
9. Impulse
10. Leading Diagonal Triangle
11. Ending Diagonal Triangle
12. Simple Zigzag correction
13. 3–3–5 Flat Correction
14. Irregular Correction
15. Formation of Irregular Correction
16. Complex correction.
17. Extended and failure wave
18. Rules of alteration
19. Combining patterns with Fibonacci ratio
20. Importance of 38% retracement ,alternate wave count and reflex point.
21. Time frame to use in Elliot wave analysis
22. Identifying multibagger stock
23. Practical use of the theory