What Happens After Elliott Wave 5?
Wave 5 in a five-wave sequence typically retraces no further than the extreme of wave 2, usually of lesser degree, known as the 382 Rule.
Contracting triangles are a popular chart pattern that can either be bullish or bearish and serve as an alternative version of barrier triangle.
Wave 5
Elliott discovered that price movements displayed on charts had their own narrative. He noticed prices moving not in a straight line but as an undulating pattern of rises and retracements he called waves. Wave 5 typically extends within an impulsive wave structure such as either zigzagging or flat, although sometimes wedge-shaped diagonal. Extensions typically occur during waves 1 or 3, though sometimes also within wave 5.
Elliott Wave Theory stipulates that an impulse wave should always be followed by a corrective wave, with uptrend impulse waves typically consisting of waves 1-4; its counterpart in downtrend trends usually consisting of waves 1-4. Corrections in higher degree should generally not retrace more than 38-78% of its predecessor’s length while also avoiding overlapping its end point.
Wave 6
Divergence occurs late in a five wave move. To close a trade based solely on indicator divergence without first considering price confirmation can lead to missed opportunities for profitable trades and miss out on profitable trade opportunities altogether.
Corrective waves tend to have lower volumes and higher volatility as investors become concerned that the trend will shift downhill.
Corrections should feature alternation within their internal wave structure. That means wave 2 shouldn’t resemble wave 4 in terms of shape. Unfortunately, this is not always achievable; for instance, an expanding triangle does not fulfill this condition, while diagonal triangles do fulfill it.
Wave 7
When the fifth wave of an impulsive sequence extends, its subsequent correction typically retraces no more than the extreme of second-degree second wave retracement retracement of lower degree waves retracement of second-wave of lower degree retracement of second-degree wave of lower degree. This is one of several corrective patterns known as triangles; two types exist: contracting and expanding triangles.
Truncation typically occurs at the conclusion of a corrective cycle and indicates a much longer Wave A than before. When this happens, markets become primed for an aggressive move in either direction.
Double threes are an accumulative pattern formed from two corrective waves (zigzags, flats or triangles) connected by an X wave that often takes the shape of a zigzag; when not being used as an indicator of trend change it should take irregular forms like irregular triangles; diagonal triangles also follow this trendline slope/tilt pattern and its apex can provide valuable clues regarding potential trend changes.
Wave 8
At the conclusion of an impulse sequence, prices typically decline and volume declines significantly; prices typically zigzag or expand into an expanded triangle pattern in their final wave; in this instance, wave E may have reached its maximum extent and should have ended.
Elliott waves follow an important rule which dictates that any corrective moves in wave 4 cannot surpass their starting point, or 100% of price of wave 1. Therefore, oftentimes this makes the beginning of wave 1 an ideal place for placing protective stops.
Alternation is another essential guideline. In general, any simple sharp move in wave 2 should be immediately followed by complex mild movements in wave 4. Although this rule doesn’t always apply within triangles (contracting or expanding), it often does for other forms of motive patterns and thus becomes known as the “Rule of Alternation”.
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