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Elliott Wave: five waves up, three waves down

The 5-3 structure, the three unbreakable rules, common Fibonacci ratios and how to trade wave 3.

Elliott Wave theory

Ralph Nelson Elliott proposed in the 1930s that crowd psychology makes price move in five waves with the trend (1-2-3-4-5) followed by three corrective waves (A-B-C), and that the pattern repeats on every timeframe.

Three rules of an impulse

  1. Wave 2 never retraces more than 100% of wave 1.
  2. Wave 3 is never the shortest of waves 1, 3 and 5.
  3. Wave 4 does not enter wave 1's price territory (except in diagonals).

Common ratios

Wave 2Retraces 50–61.8% of wave 1
Wave 3Often 161.8% of wave 1, the strongest wave
Wave 4Retraces about 38.2% of wave 3
Wave 5Often equals wave 1 or 61.8% of 1→3
CorrectionsZigzag (5-3-5), Flat (3-3-5), Triangle (3-3-3-3-3)

How to trade it

  • The best opportunity is the start of wave 3: after wave 2 retraces 50–61.8% and price breaks above the wave 1 high. Stop below the start of wave 1 (if rule 1 breaks, the count is wrong).
  • RSI divergence often appears at the end of wave 5: a time to take profit, not to chase.
Watch outWave counts are subjective; two analysts can count differently. Always set an invalidation level based on the three rules.

Try it on a chart

Educational content only, not investment advice. Practise on a demo account before using real money.