Elliott Wave Guidelines
Welcome to our fifth lesson in our module on Elliott Wave Theory, which is supplemental to our previous lesson on Elliot Wave Rules. In this lesson we discus Elliott Wave Guidelines.
What are the Elliott Wave Guidelines?
Unlike rules, guidelines are not immutable. They occur often enough to be significant, but their appearance and outcomes are more variable than in the case of rules. In other words, guidelines are illustrative of what a trader could expect but they do not always produce the anticipated results as we shall soon see. There are several guidelines for motive waves and corrective waves that can aide in labeling a wave count. These guidelines include extension, truncation, channeling, and equality.
The Guideline of Waves Extensions
Wave 3 Extension
Motive waves generally consist of five subordinate waves labelled 1-2-3-4-5, but one of these subordinate waves can be extended to form an elongated impulse wave with exaggerated subordinate waves. Extension in one of the guidelines and is usually applied to Wave 3, though it can also be applied to Wave 5. The rules for Motive Waves, discussed in the previous lesson, provide an indication of which wave should be extended. If Wave 3 is the shortest wave, or Wave 4 overlaps the area of Wave 1, then Wave 3 probably needs to be extended.
Extensions can simply be considered as counting another four waves as part of the impulse wave but instead of labeling them 1-2-3-4-5-6-7-8-9, waves 3, 4, 5, 6, and 7 are labelled as subordinate, or waves of a lesser degree. In this case it becomes 1-2-i-ii-iii-iv-v/3-4-5 with Wave v (the Wave 5 of a lesser degree) being the end of Wave 3. It is also possible to extend Wave 5 if Wave 3 is not shorter than Wave 1, and Wave 4 does not overlap with Wave 1. In this case, extending Wave 3 or Wave 5 would carry the same overall message.
Wave 1 is the lease common wave to develop into an extended wave.
The Guideline of Truncation
Truncation of Wave 5
Generally, the subordinate impulse waves in a motive wave (waves 1, 3, and 5) will all be higher than the previous subordinate impulse wave with Wave 3 usually being the strongest wave. However, Wave 5 will sometimes fail to exceed the end of Wave 3. In other words, Wave 3 fails to move beyond the price levels of Wave 3. This is called truncation, and is another guideline. The truncated fifth wave must contain five subordinate waves or the wave count will not be valid. Truncation usually occurs after a particularly strong Wave 3 and indicates weakness in the preceding trend. It is also more common in highly leveraged markets, such as Forex markets and Commodity Futures.
The Guideline of Equality
In the motive phase, Wave 1 and Wave 5 will tend to exhibit a degree of equality in terms of price movement, especially when Wave 3 is an extended wave. In other words, Wave 1 and Wave 5 will tend to be similar in length. This is another guideline that gives an indication of where Wave 5 is likely to end.
In the corrective phase, Wave A and Wave C will also tend towards equality and will tend to be more or less equal in length. This guideline can be used to determine where Wave C is likely to end.
The Guideline of Channeling
It is possible to draw a trendline connecting the ends of Wave 1 and Wave 3. A channel can then be drawn parallel to the trendline with its base at the end Wave 2. This is the guideline of channeling and helps indicate where Wave 4 is likely to end.
The Guideline of Alteration
The Guideline of Alteration applies to both the motive phase as well as the corrective phase. In the motive phase, the Guideline of Alteration states that the two corrective subwaves of a Motive Wave (Wave 2 and Wave 4) will tend alternate in terms of shape. In other words, one of Wave 2 and Wave 4 will be a sharp Zigzag Correction while the other will tend to be a shallower, sideways correction, such as a Flat Correction, or a Triangle Correction.
In the motive phase, it is more often Wave 2 that becomes a sharp correction and Wave 4 that becomes a sideways correction.
In the corrective phase, it is Wave A and Wave B that will alternate between a sharp Zigzag Correction and a sideways Flat, or a Triangle Correction.