Besides technical characteristics, Elliott Wave analysts are also familiar with individual wave personality, which typically reflects the psychology of the moment. In the picture below you can see an example of the rising trend – 5 wave impulsive structure.
- Wave 1 is rarely obvious at its inception . Traders believe the previous trend is still strongly in force and it’s usually considered as correction. Volume might increase a bit as the move progresses, but not by enough to alert many technical analysts. Occasionally it could take the structure of a leading diagonal.
- Wave 2 corrects Wave 1 and it could never extend beyond the start point of Wave 1. In most cases it does not retrace more than 61.8% or 76.4% of wave 1. It usually takes the form of a Zig Zag, Flat or Double Three and it could never be a Triangle. Volume should be lower during Wave 2 than during Wave 1.
- Wave 3 is usually the largest and most powerful wave in a trend. Price is progressing quickly, while corrections are short-lived and shallow. By the midpoint of Wave 3 the crowd will often join the new trend. Wave 3 must exceed at leas 1.618 fib extension of wave 1 and could go up to 2.618 fib extension or more. Wave 3 cannot be the shortest one.
- Wave 4 is typically clearly corrective. Price could go sideways for an extended period and typically retraces less than 38.2%, usually 23.6% of Wave 3. Fourth waves are often frustrating because of their lack of progress in the larger trend. Wave 4 does not overlap with the price territory of Wave 1, except in the case of a diagonal. It’s structure is usually flat, triangle or irregular correction. At Elliottwave-Forecast.com, we don’t label a Wave 4 if it passes 50% Fibonacci retracement of wave 3 (unless a diagonal).
- Wave 5 is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is lower in Wave 5 than in Wave 3 and many momentum indicators start to show divergences. It often takes form of ending diagonal structure.
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