Elliott wave: the impulse (1-2-3-4-5)

The idea in plain words

Ralph Elliott saw crowd psychology repeating in patterns: optimism builds in five steps, then a three-step correction follows. Wave 1 is the first sceptical move, wave 3 usually the strongest as everyone joins in, and wave 5 the final push while enthusiasm is highest.

How it is calculated

Click the start (0) and the ends of waves 1, 2, 3, 4 and 5. The tool labels them, checks the three Elliott rules and shows the wave ratios. Targets: after wave 4 it draws where wave 5 is likely to end (equal to wave 1, or 0.618 × waves 1 to 3) and the level that would make the count wrong; after a full five it draws the usual correction targets (38.2%, 50% and 61.8% of the whole move). Untick "Show targets" to hide them.

Rule 1: wave 2 never goes beyond the start of wave 1
Rule 2: wave 3 is never the shortest of 1, 3 and 5
Rule 3: wave 4 does not overlap the territory of wave 1
Common ratios: wave 2 retraces 50–61.8% of wave 1; wave 3 ≈ 1.618 × wave 1;
wave 4 retraces 23.6–38.2% of wave 3; wave 5 ≈ wave 1

How to use it

• Look for wave 3 opportunities: after wave 2 holds above the start, the strongest leg may follow.
• After a completed five, expect a correction (A-B-C) against the trend.
• If a rule is broken (the tool warns you), the count is wrong; recount.

Drawing conclusions

• Waves contain smaller waves: a wave 3 on a daily chart has five smaller waves on an hourly chart. The degree setting changes the labels ((1), [1], i…) to show which size of wave you mean.

Watch out for

• Wave counts are subjective; two analysts can count the same chart differently.
• Use the rules to rule counts out, and other tools to confirm.

A little history

Ralph Nelson Elliott developed the theory in the 1930s and published "The Wave Principle" in 1938. Robert Prechter and A. J. Frost revived it with "Elliott Wave Principle" (1978).