Elliot Impulse Wave
Common fib levels in an Elliot impulse wave.
Analysis Type: Elliot wave theory.
Type of strategy: A model attempting to forecast trend formation.
Conditions for use: The impulse leg in Elliot wave is only forming when we’re in strong trending conditions. These concepts can be used for macro trend analysis and trading intra-day trends. The concepts of this will fail regularly in range based markets.
Basic strategy theory: Elliot’s theory was devised in the 1940s and still has a lot of practical application today. Elliot wave theory has many layers to it (Which get complicated) but for this piece we’re going to focus on the basic principle of Elliot wave, which is markets will trend in five main swings. Three of these in the direction of the trend and two of them being corrections to the trend. Known in Elliot as the “Impulse wave”.
Drawing the fib swing: In this example we’re going to look at tendencies when we draw a swing from the pullback of wave 2. We’re looking for ways in which it can help us trade waves 3, 4, 5 and possible even the ABC.
Things we usually see before the strategy trades: The first leg of a trend comes from unexpected conditions. The market will have been in an overall trend but in a correction of that trend for a long time. Then a strong and consistent move in line with the underlying trend comes. Breaking the recent corrective trend’s structure. This move goes on for a while and then starts to pullback. The pullback is unable to make a new high/low. Then a really strong trend move begins.
Commonly seen levels:
Wave 3 will commonly continue without major (But multiple minor) pullbacks until around the 261 fib.
It will then commonly trade back to the 161 fib (And can spike 127 in extremes).
The trend will then have another burst to the 423 fib.
Our easy trades here are the pullback on the first break of 161 trading up to 261.
The pullback to the 161 (And sometimes 127 + spike in extremes) and target 423.
We can also consider reversal trades around the 423, but reversal trades never tend to be easy. Often there’s a lot of value in starting to fade moves on 423 spike outs using things such as harmonics to help you find good stop loss areas.
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