Elliott Wave Theory

Elliott Wave Theory is a neutral chart pattern that represents price consolidation. The market is in balance and coiling energy for its next directional move. A confirmed breakout in either direction determines the trade.

What This Pattern Tells You

Price is coiling into a tighter range, reducing volatility and compressing energy. This consolidation often precedes a significant move. The pattern itself does not predict direction, but the eventual breakout tends to be decisive.

How to Trade It

Entry: Enter after Wave 2 completes.

Stop loss: Place your stop loss above the highest point of the pattern.

Target: Aim for a measured move equal to the height of the pattern, or target the next significant support or resistance level.

Confirmation: Do not act on the pattern alone. Require at least one confirming signal such as a follow-through candle, a volume spike, or a supporting oscillator reading before entering.

When Is It Most Reliable

Neutral patterns are most useful as breakout setups when they form after a prior directional move. The breakout direction tends to continue the prior trend. Volume on the breakout is the most important confirming factor.

How to Identify It

The following elements must all be present to confirm Elliott Wave Theory:

• Wave 1: Initial move up.
• Wave 2: Pullback (never below Wave 1 start).
• Wave 3: Strongest move (usually longest).
• Wave 4: Correction (doesn’t overlap Wave 1).
• Wave 5: Final push (often with divergence).
• Followed by A-B-C correction.

Reliability

With an 75% historical success rate, Elliott Wave Theory sits in the high reliability tier among chart patterns. No technical signal is infallible. Always define your maximum acceptable loss before entering a trade, and honour your stop loss without exception.