ASX Charting Course

Chapter 37

The Elliot Wave Principle

Associated Rules and Guidelines

Correct counting - Overlaps and Wave Length

Wave four should never overlap wave one

Wave three is often the longest and never the shortest

Alternative Counting

There are often alternative counts, which is a tool that can be employed to isolate the correct count. Hindsight will always provide the ultimate resolution. But it is very handy to have a “if this happens, then it can’t be this count and therefore it must be the alternative one” type of tool in our arsenal. Therefore there is an alternative to the above count.

Time Frames

The most common time frame for an intra day chart is an hourly chart, however when analysing large samples of time an hourly chart can become unworkable. Percentage charts or semi-log charts are best when analysing large market moves that may span decades. Daily charts are of course most apt and a standard when applying Elliot wave principles.

The foremost aim of wave classification under the Elliot wave theory system is to determine where we are in the cycle. This is easy to do in a clear wave count, which is often the case for fast moving or extending markets. As long as you can see fives waves you’ve got a start.

It’s not so easy in tired and choppy markets. Complexity and lethargy are often frustrating for any analyst, but especially for the Elliot wave analyst. It has often been suggested that when the market rests the trader should also take a rest.

Channels

Parallel trend channels can be employed to assist in determining a potential target and/or market developments. One can start drawing the channel at the termination of wave 2. The bottom trend line is an extension of the trend line drawn from the inception point of the new wave formation and the bottom of wave two. A parallel trend line can then be extrapolated from the top of wave one and provides a logical target fro the termination of wave three.

Quite often wave three will extend beyond the high side of the original channel, in which case the channel should be revised. A new top line should be drawn through the top of wave one and wave three, a parallel line is then drawn through the bottom of wave two and a new channel should be the result.