My last article discussed the general ins and outs of Elliott Wave pattern analysis.
In today’s article, I will provide you with 4 hot tips for how to improve the accuracy of your wave analysis in practice.
Nothing is more important in Elliot Wave analysis than adhering to Elliott wave rules. Each wave pattern has a distinct set of rules, which have to be fulfilled in order to make the pattern valid. If certain requirements are not met, some other pattern must be unfolding… simple as that.
Even though this may sound like an obvious point, it is easy to over-simplify the analytical process by having too loose of an approach. It is paramount that the internal structure confirms the larger pattern. This tends to be easier when it comes to impulsive 5-wave structures, but becomes a lot harder when it comes to corrective patterns.
It is therefore very useful to have a reference resource handy for all Elliott wave rules, so that you can quickly check and confirm that your wave labeling is adhering to them.
This website offers a great summary of Elliott Wave rules and guidelines for each pattern. The website divides the notes into ‘Rules’ and ‘Guidelines’. ‘Rules’ are those parameters that MUST be met, where as ‘Guidelines’ are not strict rules as such but simply how the pattern tends to appear in many cases.
Starting your analysis from the broadest time perspective is advantageous. If you can define the large wave cycles accurately, you will have a much better sense of what price is most likely going to do on a smaller scale. You will be able to gauge better how long a trend may last and be more prepared for potential price turns on smaller time frames. The chart below shows an example of an AUD/NZD weekly chart
Starting your wave analysis from a broad time perspective helps to simplify the process of deciphering smaller wave patterns. That’s because if you have a sense of the larger-scale wave pattern, it defines what the internal structure should look like. You then know what to look for on smaller timeframes in order to confirm the larger pattern. If they match up, you can be fairly certain about what price-action should come next. If you can’t marry the internal structure to the larger wave pattern, you have to reconsider the validity of the bigger pattern.
Try and look at wave patterns on the weekly or monthly charts first, and slowly work your way into the relevant structure of the current moment. It is also handy to check historical charts that go back 50 years or more to get the broadest perspective possible.
No doubt the best trades happen if we can catch an impulsive Wave early on. But in order to catch those, we need to become adept at defining corrective structures accurately. So a lot of the pre-trade analysis has to go into knowing what kind of corrective pattern is unfolding so that you know when it will be complete. This will have a two-fold benefit of protecting you from entering trades too early, as well as not missing the boat when price goes into impulsive trend continuation. Here, again, the key lies in knowing the rules of each corrective pattern well. A good exercise for this is to look for a very complex and corrective piece of price-action on a daily chart. Once you find one, zoom in and try to define all of its micro-structure. This will familiarize your brain with the many permutations in which corrective patterns can appear. Below is an example
Differentiating between 5-wave impulses and 3-wave structures is not always as easy as it first appears. That’s because every corrective structure has internal impulsive waves (for example zig-zags contain 2 impulses and double zigzags 4). But the quality of the candles that make up a swing can give clues as to which pattern is more likely. A true 5-wave impulse is generally very clear and straight, and fits nicely within a trend channel. Zig-zags on the other hand will show more unusual ‘kinks’, be less clean and straight, and will not fit into a trend channel that connect waves 1 with 3 and 2 with 4.
Wave analysis requires time and regular practice to become more refined and accurate, but if you persist, it can be of enormous value to your trading performance.
All the best along your trading journey