3rd Leg Trading

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Characteristics of Waves

Calculations within the Elliott Wave Theory resemble a road-map. Every wave has a set of characteristics. These characteristics are based on market behavior of masses.

In the Elliott Wave Theory, a special attention is paid to individual description of each wave. Besides, there are certain laws used for proportional formations of Elliott waves (Fig. 3). These laws enable proper definition of where the wave starts and how long it is. The wave lengths are measured from high to low of the corresponding wave.

Wave Classical Relations between Waves
1 -
2 0.382, 0.5, or 0.618 of Wave 1 length
3 1.618, 0.618, or 2.618 of Wave 1 length
4 0.382 or 0.5 of Wave 1 length
5 0.382, 0.5, or 0,618 of Wave 1 length
A 1, 0.618 or 0.5 of of Wave 5 length
B 0.382 or 0.5 of Wave A length
C 1.618, 0.618, or 0.5 of Wave A length


The above classical relations between waves are confirmed by actual ones with a 10%-error. Such error can be explained through short-term influences of some technical or fundamental factors. In whole, the data are rather relative. Important is that all relations between all waves can take values of 0.382, 0.50, 0.618, 1.618. Using this, we can calculate relations between both wave heights and wave lengths. Let us consider characteristics of each wave:

¦Wave 1
Happens when the «market psychology» is practically bearish. News are still negative. As a rule, it is very strong if it represents a leap (change from bear trend to the bull trend, penetration into the might resistance level, etc.). In a state of tranquillity, it usually demonstrates insignificant price moves in the background of general wavering.

¦Wave 2
Happens when the market rapidly rolls back from the recent, hard-won profitable positions. It can roll back to almost 100% of Wave 1, but not below its starting level. It usually makes 60% of Wave 1 and develops in the background of prevailing amount of investors preferring to fix their profits.

¦Wave 3
Is what the Elliott's followers live for. Rapid increase of investors' optimism is observed. It is the mightest and the longest wave of rise (it can never be the shortest) where prices are accelerated and the volumes are increased. A typical Wave 3 exceeds Wave 1 by, at least, 1.618 times, or even more.

¦Wave 4
Often difficult to identify. It usually rolls back by no more than 38% of Wave 3. Its depth and length are normally not very significant. Optimistic moods are still prevailing in the market. Wave 4 may not overlap Wave 2 until the five-wave cycle is a part of the end triangle.

¦Wave 5
Is often identified using momentum divergences. The prices increases at middle-sized trade volumes. The wave is formed in the background of mass agiotage. At the end of the wave, the trade volumes often rise sharply.

¦Wave A
Many traders still consider the rise to make a sharp come-back. But there appear some traders sure of the contrary. Characteristics of this wave are often very much the same as those of Wave 1.

¦Wave B
Often resembles Wave 4 very much and is very difficult to identify. Shows insignificant movements upwards on the rests of optimism.

¦Wave C
A strong decreasing wave in the background of general persuasion that a new, descreasing trend has started. In the meantime, some investors start buying cautiously. This wave is characterized by high momentum (five waves) and lengthiness up to 1.618-fold Wave 3.