Based on the structure of a trend, crypto traders can use the Elliott Wave principle to determine if a rally is part of a corrective phase or continuation of the old trend. The basis of the complete Elliott Waves cycle is five waves in the direction of the trend, followed by a three-wave countertrend move.
Motive and Corrective Waves
The two main phases of crypto markets are motive and corrective. With a little training, these phases can be relatively easy to spot on a chart.
- Motive waves are thought of as having five subwaves inside of them, with two patterns that you will find in the motive phase: the impulse wave and diagonal wave
- A corrective wave is a partial retracement of the previous motive wave
The Basic Elliott Wave Pattern
Elliott wave patterns
- Wave 1 to 5
- Each mini-trend is called a wave, and the label of that wave is placed at the end of the trend.
- The wave that starts at the lower left and progresses higher to “1” is called Wave 1. The following correction, called Wave 2, follows Wave 2.
The Bottom Line
Elliott Wave Theory is a market analysis method that has been around for nearly 100 years. When correctly implemented, Elliott Wave provides a framework for the mood of the market. It can help traders identify opportunities in the direction of the larger trend.
- The reliability of Elliott Wave theory depends largely on the experience level of the analyst or trader.
Trends and Consolidation
Trend waves is labeled with numbers and Roman numerals, while corrective waves are labeled with letters
- Example of the Bitcoin chart: strong trend moving higher, each rally is met with a short-term consolidation that is a partial retracement of the rally
Elliott Five-Waves Movement Explained
In March 2021, Ethereum began building what we now know is a five-wave impulse pattern.
- Had a trader been watching this in real-time, they would have recognized a completed impulse subwave and corrective zigzag pattern, which built waves (i) and (ii) in March.
What is the Elliott Wave Theory?
Used by traders who look for recurring patterns based on market sentiment
Elliott Wave Price Cycle
Elliott waves consist of two distinct phases: phase of progress called “motive,” and a phase of regress called “corrective wave.”
Spotting the Crypto Trends
Elliott Wave price cycles appear in all large financial markets with price histories and are present in crypto markets, too.
- A trader can spot developing trends for Bitcoin, Ethereum, and other cryptocurrencies with a basic knowledge of Elliott Wave and its patterns.
Best Entries and Exits Based on the Waves
The best waves to anticipate and trade are the ends of Wave 2, as you would trade Wave 3
- Wave 3s tend to be the longest waves, so they offer great reward potential with limited risk
- Trading Wave C in a correction could yield a nice reward, too
Elliott Wave and Fibonacci Retracement Levels
The Elliott Wave cycle consists of eight waves, plus their corresponding five subwaves, whose numbers are numbers of the fibonacci number sequence, so it is mathematically intuitive that it is also useful in developing an Elliott Wave count and prediction.
- Additionally, adjacent waves tend to be related to a common Fibónacci retracement level.
Estimating the Depth of Corrective Waves
The two main corrective waves are the second and fourth waves of an impulse.
- If you believe the first wave of a new trend has completed, then the second wave must retrace less than 100%, and the minimum retracement level is generally more than 23%.
The Elliott Wave Oscillator
Created to help newer traders determine which wave the market may be in
- The EWO generally appears at the bottom of your chart
- Highest and lowest values of oscillator might indicate Wave 3
- If the oscillator pulls back to the zero line, then it’s considered Wave 4
- Lastly, if the market’s price makes a new extreme, that may indicate a fifth and final wave of the sequence
Is Elliott Wave Reliable?
Elliott Wave analysts who have learned the intricacies of Elliott Wave Theory would suggest it does a good job of describing the context of the market’s behavior.
- Newer traders may pass it off as subjective and not useful, but stick with it and you’ll find out.
Wave Degrees
Elliott described nine degrees of waves, from the smallest, Subminuette (minutes) to the largest, the Grand Supercycle (multi-century).
- The waves that make up a smaller degree of trend become the building blocks for the waves that form the next higher wave degree.
