Elliott wave manual v2

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Nicola Delic

Elliott Wave DNA

Elliott Wave History
The best way to learn any strategy is to start at the beginning! My strategy is built
around the Elliott Wave Theory: That’s a near-century-old and proven strategy
developed by the great Ralph Nelson Elliott. "R.N." as he was called, began his career
as an accountant and before his big discovery he published two books: Tea Room &
Cafeteria Management and The Future of Latin America.
After his visit to Central America he contracted an illness that forced him to retire from
accounting. He decided to spend the rest of his life studying the stock market. He

started by analyzing huge amounts of market data. He examined 75 years of historical
data from the DOW Index – from yearly Images down to half-hour fluctuations.
His discovery was amazing. He managed to crack the market code without modern-day
technology! You need to keep in mind that back then you needed to print charts by
hand, and you didn’t have access to any piece of code that could analyze the market.
So everything R.N. Elliott did was manual!
In all of the charts he analyzed there were certain patterns that repeated themselves
and those same patterns repeated on a larger scale also. Today we know these
patterns as “Elliott Waves.”
In 1946 Elliott published his final work, Nature’s Law – The Secret of the Universe,
where he explained how the market works.

Image 1

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Elliott discovered that the market only has two phases that repeat, and you can see
them on every single timeframe and in every single instrument. You can view a good
illustration of these phases in Image 1.
The first phase is called the Motive Phase. This is the part of the cycle that moves in the
direction of the larger trend. You will notice on Image 1 that there are five waves labeled
with numbers from 1 through 5. The second phase is called the Corrective Phase. This
part of the cycle represents pullbacks that happen in the market. Within the corrective

phase we find just three waves; labeled with letters A, B, and C.
We know that the patterns repeat and repeat, so they link to each other and build the
same pattern on the larger scale. The image below depicts an example of this.

Image 2
Now to understand this better, imagine that Image 1 is a move found on the 5 minute
chart and that Image 2 represents the movements of the pair on the 15 minute chart.
We can advance now to see how these patterns would look on the largest scale.

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Image 3
In Image 3 we can see that we have many waves, however all need only to be counted
from 1 to 5 and from A to C. True, you’ll need to learn a few patterns and rules along the
way, but I promise it’s not that complicated at all.
Let’s move to covering the first phase in the Elliott Wave Theory, The Motive Phase.

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Motive Phase
The Motive Phase is the first group of patterns we need to learn in our quest to build a
perfect trading strategy. In this group we have just four different patterns to learn and
most of the patterns a have few things in common.
Each pattern from this group will have a five-wave structure, and you can always spot
them as they move in the direction of the larger trend. To make it easy, we are going to
label each wave from this group with numbers from 1 through 5, just like on Image 1.
Since the market is never going to move in just one direction, we are going to see
waves 1, 3 and 5 in the direction of the larger trend and waves 2 and 4 in the opposite
direction. This is going to be same for all patterns in the Motive Phase group.
For each of the patterns we only need to learn three rules. The rules are going to be the
same for most of them, and we will cover this part shortly.
One thing is certain, after the end of the Motive Pattern the market is going to start a
Corrective Phase. So after we finish this group you are going to know exactly when the
trend is going to change.

Image 4

We will separate the four patterns from left to right in Image 4 above (Impulsive Waves,
Extended Waves, Leading Diagonals, and Ending Diagonals respectively) into three
groups:
1. Impulsive
2. Extended
3. Diagonals

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Impulsive Waves (5-3-5-3-5)
The Impulsive Wave is the first of the four patterns we need to learn and understand.
Impulsive Waves have a simple five-wave structure that develops in the direction of the
larger trend. Just as with other Motive Patterns, we are going to use numbers from 1
through 5 to label Impulsive Patterns on the chart. After each Impulsive Pattern
completes, we are going to see some form of correction, so expect a move to then start
in the opposite direction!

Image 5

From the five-wave structure we have inside of the Impulsive Wave, waves 1, 3, and 5
are trend waves and move in the direction of the larger trend. Waves 2 and 4 are
corrective and represent short-term pullbacks in the larger trend.
For each leg of the Impulsive Wave we will have the exact number of sub-waves you
can spot on the smaller timeframes. Inside waves 1, 3, and 5 we are going to see
smaller Motive Patterns (another five-wave structure) and in waves 2 and 4 we are
going to see smaller corrections (another three-wave structure). Look at Image 5 above
to get a better understanding of how that would look on a chart.
Now to be sure that you are labeling Impulsive Waves correctly, you need to remember
and check three simple rules.
Impulsive Wave Rules





Rule #1 - Wave 2 never falls below the starting point of Wave 1.
Rule #2 - Wave 3 is often the longest wave, but never the shortest of the waves
1-3-5. Wave 3 can be shorter than wave 1 or wave 5, but can’t be shorter than
both.
Rule #3 - Wave 4 can’t enter Wave 2 territory.

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Tip: You are usually going to see Impulsive Wave patterns in the direction of the larger
trend, and you can check for wave 5 after you see some strong and sharp movements,
but to be sure you are on the right track make sure all three rules are in place.

:
Image 6: Impulsive Wave Example in a Bullish Trend
On the daily chart of the GBP/USD pair we can observe a strong upward movement
from 1.5607 towards 1.9138. This move has our five-wave structure and appears as an
Impulsive Pattern. The main three rules were all respected, and wave 2 (2w) held above
the start of wave 1. Wave 3 (3w) is not the shortest wave (In fact, wave 3 is the longest
wave here.) and wave 4 held above wave 2 territory.

Image 7: Impulsive Wave Example in a Bearish Trend
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The main trend on this EUR/USD chart in Image 7 is down, and again we see the fivewave structure from the high at 1.1317 towards 1.1199. Again, we are going to check
the rules: wave 2 held below the start of wave 1, wave 3 is the strongest wave, and
wave 4 held below the territory of wave 2.
Now look at these two examples again and see what market did after wave 5
completed! The market pulled back in what looks like 3 corrective patterns. Until we
cover corrections I want you just to watch for the 3 corrective patterns against the trend
after we complete the Motive Phase.

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Extended Waves (5-3-5-3-5-3-5-3-5)
Usually one of the Motive Waves (1-3-5) would extend further into another five-wave
pattern. At this point, instead of only five waves, we can expect with additional moves to

have a total nine-wave structure. This type of movement in the market we call Extended
Waves.

Image 8
Extended Waves appear due to high volatility in the market and you can expect to see
extended waves frequently on your charts especially in the Forex and Stock markets.
You need to remember that only one wave from waves 1, 3, and 5 can become
extended, so don’t try to label two or all three waves as extension. Usually wave 3 has
the best chance to become extended. Every leg of the Extended Waves have the exact
number of sub-waves you can spot on the smaller timeframes. Within waves 1, 3 and 5,
we are going to see a smaller Motive Pattern (another five-wave structure) and within
waves 2 and 4, we are going to see smaller corrections (a three-wave structure).
On completion of the nine-wave structure we would have a complete Motive Pattern, so
we can then expect a pullback that will take the shape of a correction (three wave
structure).
Extended Wave Rules


Rule #1 - Wave 2 never falls below the starting point of wave 1.



Rule #2 - Wave 3 is often the longest wave, but never the shortest of the waves
1-3, and 5. Wave 3 can be shorter than wave 1 or wave 5, but can’t be shorter
than both.



Rule #3 - Wave 4 can’t enter wave 2 territory.

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Since in Extended wave patterns you have 9 waves, and you now have two Motive
Patterns, you would need to check the three rules above in the main wave 5 and inside
wave 5 of the extension.
Tip: The strongest volatility in the market occurs after important fundamental events.
Usually after important news we’ll see strong spikes in the market and this is when you
can expect to see extended waves.

:
Image 9: Extended Wave Example in a Bullish Trend

On this daily chart of SILVER we can see a strong upward trend with a Motive pattern.
On closer inspection we can see that we have 9 sub-waves in total, so after checking all
the rules, we determined an extended wave 3 and labeled these waves from i to v.

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Image 10: Extended Wave Example in a Bearish Trend
On this chart of AUD/JPY we have a clean and nice downtrend from 104.43. We will
count wave 1 as the extended wave, but wave 3 is still the largest wave of waves 1,3,5,
and that makes the Impulsive Pattern valid (wave 3 can be shorter than wave 1 or wave
5 but can’t be shorter than both waves 1 and 5).

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Leading Diagonals (5-3-5-3-5)
Leading Diagonals (LD) are the first of the two patterns we have in the diagonal group.
Just as with each Motive Pattern, LD also have a five-wave structure that moves in the
direction of the larger trend. This pattern can only be found in wave 1 or A (in the case
of a Zig-Zag).

Image 11
What separates Leading Diagonals from Impulsive Waves is wave 4. In the Leading
Diagonals pattern, wave 4 enters the territory of wave 2. This occurs because during
wave 1 or A, people are still optimistic about the previous trend and they try to re-enter
that market.
The sub-structure is the same as we have in the impulsive pattern. Waves 1, 3, and 5
subdivide further into a smaller five-wave pattern, and waves 2 and 4 subdivide into

smaller corrections. This pattern you can see on Image 11 – on the right hand pattern.
Once we complete a Leading Diagonal structure we would have a complete Motive
Pattern, and we can expect a pullback that will take the shape of a correction (threewave structure). After a Leading Diagonal there is usually a deeper pullback expected.

Leading Diagonal Rules


Rule #1 - Wave 2 never falls below the starting point of Wave 1.



Rule #2 - Wave 3 is often the longest wave, but never the shortest of the waves
1-3-5. Wave 3 can be shorter than the wave 1 or wave 5, but can’t be shorter
than both.



Rule #3 - Wave 4 must hold above the start of Wave 2.

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Tip: Since we know that LD patterns appear only inside of wave 1 or A, and we know
that wave 1 starts when the trend is changing, we can expect to see this type of move in

the opposite direction of the trend or when the trend ends.

:
Image 12: Leading Diagonal Wave Example in a Bullish Trend
In this image above, we see that after a strong decline that lasts for a couple of weeks,
the GBP/USD trend appears to be changing. We determine 5 waves from the bottom
low, however we note that wave 4 has entered the territory of wave 2 (at the red line),
so we can’t determine these as Impulsive or Extended waves. Since we can determine
this as a larger wave 1, we can refer to the pattern as a Leading Diagonal pattern.
But again, don’t forget that wave 2 needs to remain above the start of wave 1, wave 3
can’t be the shortest wave, and wave 4 must end above the starting point of wave 2. We
know that after a 5 wave upwards move we should expect 3 waves down, and while the
price holds above the start of wave 1 we can continue to watch for more bullish
movements.

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Ending Diagonal (3-3-3-3-3)
This pattern occurs during the Motive phase and they also form part of the diagonal
group. Just as we had a Leading Diagonal at the start of the trend, the Ending Diagonal
is the pattern that appears in the ending stages of the trend, in either wave 5 or wave C.

Image 13

As with the LD we have a five-wave structure that moves in a direction of the market,
and the 4th wave that needs to test territory of wave 2. The biggest difference between
the Ending Diagonal and the rest of the Motive Patterns is the number of required subwaves.
Inside each leg of the Ending Diagonal: waves 1, 2, 3, 4 and 5 we have a smaller
correction (a three wave structure), so we are going to have five corrections in total in a
direction of the larger trend.
Once we complete the Leading Diagonal structure we would complete the Motive
Pattern, so we can expect a pullback that will take the form of a correction (a three wave
structure).
Ending Diagonal Rules


Rule #1 - Wave 2 never falls below the starting point of Wave 1.



Rule #2 - Wave 3 is often the longest wave, but never the shortest of the waves
1-3-5. Wave 3 can be shorter than wave 1 or wave 5, but can’t be shorter than
both.



Rule #3 - Wave 4 must end above the starting point of Wave 2.

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Tip: The easiest way to spot the Ending Diagonal on a blank chart would be to look out
for a Wedge Pattern. Wedge Patterns appear at the ending stages of the trend, and
usually that’s where you can spot 5 waves with 3 sub-waves within!

:
Image 14: Ending Diagonal Wave Example in a Bullish Trend
On the chart above of the EUR/USD pair we can observe strong and sharp bullish
movements that started during the first half of 2015, but right before the drop there was
a contest going on between buyers and sellers. If you count how many waves we have
from the end of wave 4 you’ll see a five wave structure [labeled (i) to (v)].
In the chart you can clearly see that wave (i) is the strongest wave, but since wave (iii)
is larger than wave (iii) we say that rule 2 has been complied with. But since the price
movements in wave (v) drop to test the territory of wave (ii), we determine this as an
Ending Diagonal.
After the breakout of the lower trend line of the Wedge Pattern we spot a solid 3 wave
move.
My suggestion is to go over each of the Motive Patterns again and to try to spot them on
a few charts before you move on to cover the second phase of the Elliott Wave Theory:
The Corrective Phase.

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Corrective Phase
We‘ve looked at patterns of the Motive Phase and since markets don’t just move in the
same direction all the time, we now need to take a look at the second phase; the
Corrective Phase. An easy way to remember the corrective phase would be to think of
these patterns as a three-wave move against the trend.
To separate visually the Corrective Phase from the Motive Phase on the charts, we will
label these patterns using the letters A, B, and C. From the three waves, waves A and C
will move in the same direction, and that’s usually going to be against the larger trend,
and wave B will be the correction in the middle.
There are a few more patterns to be learned in this phase, and we will cover their rules
and the best way to find them.

Image 15
Again we are going to separate all the patterns into smaller groups, so that they are
easier to learn and understand. The easy way to name these patterns would be as
Simple Corrections (Zig-Zag, Flat, and Triangle) and Complex Corrections (Double &
Triple Three).
The main difference with the Corrective Patterns would be the number of sub-waves in
waves A-B-C. For every pattern you’ll have an exact number of sub-waves you need to
find, and I strongly suggest you try to memorize them as soon as possible.

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Zig-Zag Correction (5-3-5)
The Zig-Zag (ZZ) correction is the first pattern of the Corrective Phase you need to
learn. This is generally speaking the easiest type of correction to learn since it has a lot
in common with Motive Waves. Zig-Zag corrections have a simple three-wave structure
that we label:
A -B-C.
Waves A and C are both Motive in nature and have
five sub-waves within. Usually they form an
Impulsive Wave. Wave B is another correction and
within that three smaller waves will form either
another small Zig-Zag or Triangle.
You really need to learn this part: In a Zig-Zag we
have 5 waves in A, 3 waves in B, and 5 waves in C
(5-3-5).
You will notice that Zig-Zags have the same
amount of sub-waves as the 1-2-3 pattern,
however what separates the A-B-C from the 1-2-3
pattern is the end of wave C. Within a Zig-Zag C is
usually going to be equal in size to wave A, while in
a motive phase, Wave 3 is usually the longest
wave
Image 16

A Zig-Zag correction is a common pattern to find in
waves 2, 4 and B.

Zig-Zag Correction Rules



Rule #1 - Wave B must end below the start of wave A.



Rule #2 - Wave C must break below the end of wave A.

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:
Image 17: Zig-Zag Correction Example in a Bullish Trend

On the USD/JPY example above we can see that the 3 wave (A-B-C) moves higher,
and the first and third legs move are more or less equal. There is not big difference
between them, and that’s the main reason why we decide on it being a Zig-Zag. Now
we have 5 waves in A, 3 waves in B, and 5 waves in C. After this correction we expect
to see an Impulsive Wave move downwards.

Image 18: Zig Zag Correction Example in a Bearish Trend

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This USD/MXN example in Image 18 is one of the clearest on how to find the ZZ. After
a top, that occurred around August 25th, this exotic pair developed its first 5 wave
structure lower, and if you didn’t understand the larger count, you might say that we are
ending either wave 1 or wave A, right? Next we have a consolidation that looks like a
Triangle, and since we know that wave 2 can’t be a Triangle… it follows then that a ZigZag in wave B is the only option! Finally we see a 5 wave move within wave C. These
are virtually equal to those of wave A.

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Flat Correction (3-3-5)
The Flat correction is also one of the simpler Corrective Patterns. We also have only a
three-wave structure that we are going to label with the letters: A-B-C.

Image 19
Waves A and B in the Flat correction are both corrective in nature, so we need to see
three waves inside each of these legs. In about 90% of cases both waves A and B are

just going to be smaller Zig-Zag corrections, but you can also expect other types of
corrections inside these such as Flat or Complex corrections. Wave C is the only Motive
Pattern, so we can expect five waves in the final leg.
Flat corrections have a few different variations but they all must have one thing in
common: wave B in the Flat needs to test at minimum 90% of wave A if we are to call
the pattern valid (you can allow 78.6% as the minimum in the Forex market).
We have three patterns in the Flat group: Regular, Expanding & Running. Although they
are all very similar, there is a slight change in each pattern.

Regular Flat
Regular Flats have three waves against the larger
trend. They have 3 waves in A, 3 waves in B and 5
waves in wave C. For the Regular Flat to be valid,
wave B needs to end at least at 90% of A wave (78.6%
is allowed in the Forex market), but should end below
100%.

Image 20

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Regular FLAT Rules


Rule #1 - Wave B must retrace to 90% of wave A (78.6% allowed in Forex).



Rule #2 - Wave C must end below the ending of wave A.

Image 21
On the image above we can see that the USD/CAD made a 3 wave move from 1.0061
to 0.9952. We have a deep pullback in wave B (although not apparent from the image
exact levels were over 78.6% of the A wave). So a Flat is the determination.
Furthermore, we held below 100% of wave A in wave B and we broke below the end of
wave A in the C wave and we can name this as being a Regular Flat.

Expanding Flat
The Expanding Flat patterns have the same
amount of sub-waves as a Regular Flat: 3
waves in A, 3 waves in B and 5 waves in C. The
only difference is with the ending of wave B. In
this type of correction wave B ends between the
inverse of 123.6% and 161.8% of wave A.

Image 22
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Expanding Flat Pattern Rules


Rule #1 - Wave B needs to break through the start level of wave A, but can’t end
above an inverse of 161.8% of wave A.



Rule #2 - Wave C needs to end below the end level of wave A.

Image 23
Again the image above has the USD/CAD as an example. We have a 3 wave move
down in wave A and a breakout above wave A, but movements still look corrective in
nature, so I labeled that next 3 wave move as wave B and, lastly we have 5 wave
downward move in the C wave. Because price action in wave B was corrective in nature
and broke through the start level of wave A, I determine this as an Expanding Flat.

Running Flat
The Running Flat is same as the Expanding Flat
in structure. We have 3 waves in wave A, 3
waves in wave B that end above the start level
of wave A, and within wave C we have 5 waves.
The difference between them is only found with
the end of wave C. In the Running Flat pattern
wave C must end above the end level of wave
A.
Image 24
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Running Flat Pattern Rules


Rule #1 - Wave B needs to break the start level of wave A, but can’t end above
an inverse of 161.8% of wave A.



Rule #2 - Wave C needs to end below the end level of wave A.

Of the three flat patterns, I want you to focus on the Regular and Expanding Flats.
Running Flats are really rare patterns to see, especially with the current high volatility in
all the markets, so you would label a pattern as a Running Flat only if you can’t
determine any other correction.

Image 25
On the chart above you can see that wave B broke below the starting point of wave A,
and that wave C appears as a strong and sharp move, but we didn’t have the
momentum to move more past 106.50%. So, as wave C didn’t end above the end level
of wave A we would regard this as a Running Flat pattern.

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Triangle Correction (3-3-3-3-3)
The Triangle correction is the final group of corrective waves from the Simple Correction
group that we are going to cover. Up until now we have only learned about corrections
that have three-wave structures. With triangles we need to add two more waves so
every triangle will need to have a five-wave structure. We are also going to use the
letters A-B-C-D-E to label this type of movement on the charts.
Triangles are patterns that appear usually in the middle and at the ending stages of the
trend, and they can only be seen in wave 4 in a Motive phase and waves B & X in a
Corrective phase.
There are four different types of triangle patterns we need to learn. To better understand
every triangle pattern let’s take a look at the images below.

Image 26
When examining each of these triangles we will notice differences.

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Contracting Triangles
Contracting triangles are the simplest five-wave triangle, where each of the triangle’s
legs is smaller than the previous one.

Contracting Triangle Rules
 Rule #1 - Wave B must be smaller than wave A
 Rule #2 - Wave C must be smaller than wave B
 Rule #3 - Wave D must be smaller than wave C
 Rule #4 - Wave E must be smaller than wave D
Image 27

Barrier Triangles
A Barrier triangle is similar to Contracting triangle. This is also a five wave triangle.
Wave B and wave D need to end at similar levels. When you draw a trend line it should
form a good support/resistance area.

Barrier Triangle Rules
 Rule #1 - Wave B must be smaller than wave A
 Rule #2 - Wave C must be smaller than wave B
 Rule #3 - Wave D must be smaller than wave C
 Rule #4 - Wave E must be smaller than wave D
Image 28

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