Crypto Academy Season 2: Week 6 – Elliot Wave Theory – by @fendit

The Elliot Wave Theory and What it is all About

The Elliot wave theory is one of the many tools used in technical analysis to get a detailed overview of the general market behavior. In cryptocurrency trading or investing, the Elliot wave theory is very beneficial because of its ability to predict the movements of the market. The Elliot wave theory is simply a type of technical analysis tool that shows the different market movements based on repetitive and noticeable wave patterns.

The Elliot wave theory is such a great tool. When it comes to a tool that can accurately predict the next market movements, then the Elliot Wave has no rival, it is regarded as the best when it comes to market movement forecasting. In the Elliot wave theory, the impulsive wave sets up the wave pattern and is followed by the corrective wave which counters the larger trends. The Elliot wave follows a 5-wave pattern namely 1,2,3,4,5… the direction of the market is shown by the wave 1,3,5… which is countered by wave 2,4. In this theory, the wave 3 can never be the shortest and wave 4 can never enter wave 1.

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Application of this theory

• The Elliot wave theory is used for getting a general description of the market movements and behavioral patterns.
• The Elliot wave theory can predicting the future direction of a cryptocurrency based on the repetitive patterns in the market
• The Elliot wave theory helps traders and investors predict the potential price targets of any cryptocurrency
• The Elliot wave theory helps traders know when to enter a trade and when to exist a trade in order to make the most profit

Application of this theory

• The Elliot wave theory is used for getting a general description of the market movements and behavioral patterns.
• The Elliot wave theory can predicting the future direction of a cryptocurrency based on the repetitive patterns in the market
• The Elliot wave theory helps traders and investors predict the potential price targets of any cryptocurrency
• The Elliot wave theory helps traders know when to enter a trade and when to exist a trade in order to make the most profit

Impulsive Waves and Corrective Waves

Impulsive Waves

Impulsive waves are simply the first phase in the Elliot wave. The impulsive wave is a 5 wave sequence or structure with numbering 1,2,3,4,5. In the Elliot wave theory, the impulsive wave sets up the wave pattern and are the large waves. In the 1-5 movement, 1,3,5 move in an uptrend direction and 2,4 move in a downtrend direction.

Corrective Waves

Corrective waves are simply the second phase in the Elliot wave. The corrective wave is a 3 wave structure with lettering a,b,c. The corrective waves counters the larger trends in the impulsive wave. The market trend does not matter when it comes to corrective waves as it only goes in the opposite direction of the market trend. What this means is that if the market if the movement of the market is bullish, the corrective waves goes in the opposite direction, likewise if the movement of the market is bearish, the corrective waves goes in the opposite direction.

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How to spot the different waves

By looking at the cryptocurrency price chart, it is quite easy to spot the different Elliot waves patterns which comprises of both impulsive waves and corrective waves. Since the impulsive waves is made up of 1,2,3,4,5 numberings, and the corrective waves is made up of a,b,c lettering, both can be easy to spot.

• Wave 1 is the first impulse wave. This first impulse mostly happens when the project is still in its early stage. It is considered the first wave when the bullish market begins. The first impulse wave can be caused by investors and market sentiments which causes a bullish movement.

• Wave 2 is the wave that corrects the wave 1. It moves in the opposite direction of wave 1. The rule is that wave 2 cannot go beyond the beginning of wave 1. At this point, the market retest the previous low and market sentiments can cause the market to go in a downward direction. This is a great entry point for the massive bullish movement of wave 3.

• Wave 3 is usually the largest wave in the sequence. As the cryptocurrency begins to gain more popularity and attention, a lot of investor jump in, then the price of the cryptocurrency begins to rise at a rapid rate.

• Wave 4 is the wave that corrects wave 3 or go in the opposite direction of wave 3. Wave 4 downward move can be cause by people investors selling their coins to make profit which causes the price to retrace or pull back. For some, this is a good entry point to get ready for the next bullish movement.

• Wave 5 is the last impulse wave. At this point, the sequence is completed and as the market prepares for the corrective phase.

• Wave A is the first corrective wave in the bear market, however, it can be very tricky to identify the corrective wave. At this point, the market is still very much positive as people aren’t sure of the market situation.

• Wave B is the wave that temporarily corrects wave A. At this point, many users are expecting the market to continue in the upward direction. At this point, the volume goes lower than the volume of wave A.

• Wave C is the steady correction of Wave B, the price goes in a downward trend much quicker and the bear market is confirmed.

Thoughts on this theory

This is for me the best theory for determining the nest possible movement of the market. I like this tool a lot as it gives a general overview of the market movements based on noticeable and repetitive patterns. While this theory is great at what it does and has shown time and time again that the market always tend to follow a repetitive pattern, there is no certainty that the predictions will be accurate as there are a lot of factors that can influence the market movement. It is important not to rely fully on the Elliot waves signals to take action in the market as it can also give false signals.

Sometimes it can be very tricky or impossible to spot the correct impulse and corrective waves which can lead to misjudging the market and making a false analysis. Elliot waves are known for helping in technical analysis to determine market movements based on repetitive patterns, however, it can also cause inaccurate predictions if it is relied on. The cryptocurrency market can be unpredictable because of a lot of factors that can cause the market to move in any direction.

How to Spot Elliot Waves

I will be spotting the Elliot waves impulse and corrective waves on the ETH/USDT chart.

The chart clearly shows the different wave patterns. The first 5 waves 1,2,3,4,5 are the impulse waves and the second phase waves lettered A,B,C are the corrective waves.

On Wave 1 we can see that it is the first impulse wave that kicks off the sequence. Wave 2 follows immediately to correct wave 1 by moving in the opposite direction of wave 1. We can see that Wave 2 still maintains the rule and did not go beyond the beginning of wave 1. Wave 3 follows by moving in the opposite direction of wave 2, this time, there is a bigger wave. Wave 3 is has the largest bullish move among all the waves. Wave 4 follows immediately and corrects wave 3 by going in the opposite direction of wave 3. Wave 5 goes in the opposite direction of wave 4 to complete the impulse wave sequence. At this point, the corrective phase takes over. Wave A is the first corrective wave in the bearish movement, however, this can be very tricky to identify. Wave B begins to correct wave A by moving in the opposite direction of wave A. Wave C takes over with a steady correction of Wave B, confirms that bearish market movement.

Conclusion

Elliot Wave Theory for me is one of the best tool for determining the best possible movement of the market. I like this tool a lot as it gives a general overview of the market movements based on noticeable and repetitive patterns. However, the tool also has its downsides as it not a certainty that the outcome will be accurate due to a lot of factors. It is important not to rely fully on the Elliot waves signals to take action in the market as it can also give false signals, rather use a combination of different tools to make a better predictions of the market movement.

Task post for @fendit