Immutable Elliott Wave Rules

Welcome to our fourth lesson in our module on Elliott Wave Theory. In the previous two lessons we discussed the wave structure and characteristics of Motive Waves, and Corrective Waves. Central to correctly identifying motive and correctional waves are the immutable rules of Elliott Waves. In this lesson we will discuss the immutable rules of Elliott Waves in depth before moving on to discuss Elliott Wave Guidelines.

What are the Elliott Wave Rules?

There are immutable rules in Elliott Wave Theory that aid in the labelling of Elliott Waves. These rules are immutable, which means that should never be broken. When one of these rules is broken, it indicates that there is an error in the wave count and the wave count needs to be reassessed and the waves need to be relabeled. There are general immutable rules, as well as immutable rules for Motive Waves and immutable rules for Corrective Waves.

General Elliott Wave Rules

There are a few general rules in Elliott Wave Theory:

  1. In Elliott Wave Theory, a complete market cycle consists of a 5 wave motive phase and a 3 wave corrective phase. Thus, a cycle is not complete until a 5-3 pattern, with the 5 waves of the motive phase and the 3 waves of a corrective phase, is complete.
  2. A Motive Wave always subdivides into five subordinate waves while a Corrective Wave never subdivides into five subordinate waves. There are a few exceptions to this rule however:
    • When a impulse wave is extended, it can result in a wave count of 9, though, a wave count of 5 and a wave count of 9 holds the same technical significance.
    • When a Corrective Wave is a Triangle Correction, it has a wave count of 5 and is labelled A-B-C-D-E.
    • The Motive Wave of a Triangle Correction, has a wave count of 3 as a Triangle Correction has a 3-3-3-3-3 wave pattern.
    • When a Corrective Wave is a Double or Triple Zigzag Correction, or when it is a Combination Correction, it can have a wave count of 7, 9, 11 or 13, depending on the types of Corrective Waves that form the Combination Correction.

Elliott Wave Rules For Motive Waves

There are only a few immutable Elliott Wave rules that apply to Motive Waves. These rules are as follows:

  1. Wave 2 may not retrace beyond the start of Wave 1 regardless of whether it is an impulse wave or a diagonal triangle. In other words, Wave 2 should not reach the 100.0% Fibonacci Retracement level of Wave 1. Should Wave 2 retrace to the start of Wave 1, then Wave 1 has been incorrectly labelled as the market is still in a corrective phase. What was assumed to be Wave 1 is more likely an intermediate corrective wave (Wave X) linking a Combination Correction, and what was assumed to be Wave 2 is probably Wave A of the next corrective wave in a Combination Correction. Combination Corrections are discussed in the previous lesson on Corrective Waves.
  2. Wave 3 always moves beyond the end of Wave 1. If what is assumed to be Wave 3 does not exceed Wave 1, then it is still part of a correction (Wave 2), which is developing into a Combination Correction.
  3. Wave 3 cannot be the shortest of the three motive waves, namely waves 1, 3 and 5. Wave 3 need not be the longest wave but it may not be the shortest of the three motive waves. Wave 3 is always an impulse wave; it is never a diagonal, and is usually, but not always, the strongest and longest of the motive waves. This rule is satisfied as long as Wave 3 is longer than either Wave 1 or Wave 5. If Wave 3 is the shortest of the motive waves, then what was assumed to be Wave 4 and Wave 5 are probably subordinate waves of and extended Wave 3.
  4. Wave 4 may not penetrate the price area of Wave 1. If what is assumed to be Wave 4 enters the price area of Wave 1 then Wave 3 is probably not yet complete and is becoming an extended Wave 3.
  5. Wave 4 also cannot overlap the price area of Wave 2 as Wave 2 is a correction against Wave 1.
  6. In a Diagonal Triangle, the price action in Wave 2 and Wave 4 never moves beyond the start of Wave 1 but Wave 3 always moves beyond the start of Wave 1.
  7. In a Contracting Triangle, Wave 3 is always shorter than Wave 1; Wave 4 is always shorter than Wave 2; and Wave 5 is always shorter than Wave 3.
  8. Inversely, in an Expanding Triangle, Wave 3 is always longer than Wave 1; Wave 4 is always longer than Wave 2; and Wave 5 is always longer than Wave 3.

Elliott Wave Rules For Corrective Waves

There are also a few immutable Elliott Wave rules that apply to Corrective Waves. One applies to Corrective Waves in general while the others apply to specific types of Corrective Waves. These rules are listed below:

  1. The single most important rule that applies to Corrective Waves is that they never result in a five-wave count. Only Motive Waves produce a five-wave count. Therefore, a Corrective Wave with five waves is not the end of the correction.
  2. In a Zigzag Correction, the price movement of Wave B cannot move beyond the start of Wave A. If it does, then the pattern is not a Zigzag Correction but could be a Flat Correction, or a Triangle Correction.
  3. In a Zigzag Correction, the price movement of Wave B cannot move beyond the start of Wave A. If it does, then the pattern is not a Zigzag Correction but could be a Flat Correction, or a Triangle Correction.
  4. In a Flat Correction, Wave A never forms a triangle; and Wave B always retraces at least 90% of Wave A.
  5. In a Contracting Triangle, the price action of Wave C never moves beyond the end of Wave B; the price action of Wave D never moves beyond the end of Wave C; and the price action of Wave E never moves beyond the end of Wave D.
  6. Inversely, in an Expanding Triangle, the price action of Wave C always moves beyond the end of <Wave B; the price action of Wave D always moves beyond the end of Wave C; and the price action of Wave E always moves beyond the end of Wave D.
Previous Lesson

Corrective Waves
Next Lesson

Elliott Wave Guidelines