THE HAnDBook of TECHniCAl AnAlysis
Referring to Figure 18.2 again, notice that the motive wave is labeled as
encircled number 1, indicating a wave at the primary degree. The motive wave
subdivides into three impulsive and two corrective waves, labeled as (1), (2), (3),
(4), and (5), indicating a wave at the intermediate degree. Waves labeled 1 to 5 and
A to C represents waves at the minor degree of trend.
Elliott waves are defined in terms of form, ratio, and time. Of the three, the
preservation of the 5‐3 form or pattern is of the highest importance. Fibonacci
price and time ratios are considered less important than form. Although the wave
structure is best described via Fibonacci ratio analysis, wave form (or structure)
takes precedence.
18.2 Rules and Guidelines
The identification of Elliott waves are governed by rules and guidelines. Unlike
guidelines, rules must not be breached, otherwise the wave count is invalidated.
The three main rules that govern the subwaves or waves of a lower degree with
respect to a progressive or motive wave are as follows:
- Wave 2 must not extend beyond the start of wave 1
- Wave 3 must not be the shortest wave
- Wave 4 must not extend into the price range of wave 1
In addition to the three main rules above, motive waves must subdivide into five
waves and consequently all impulse waves must also subdivide into five waves. Al-
though wave 5 may not extend beyond the end of wave 3 in some cases (especially
when truncation is present), wave 3 must always extend beyond the end of wave 1.
We shall shortly focus on each wave and its characteristics, stating where ap-
plicable, the associated rules and guidelines. In the following sections, whenever
the word “must” is used, it indicates that a rule is being stated whereas “should”
indicates a guideline.
18.3 Motive Waves
There are two types of motive waves, namely the impulse and the diagonal tri-
angle. Impulsive waves are waves that extend in the direction of a wave at a
higher degree. This means that waves 1, 3, and 5 are regarded as impulse waves
since they extend in the direction of the motive wave, which is at one higher wave
degree. The corresponding corrective wave to the motive wave also subdivides
into three waves, that is, waves A, B, and C. Waves A and C are also regarded as
impulse waves since they extend in the direction of the larger corrective wave,
which is at one higher wave degree to waves A, B, and C.
The diagonal triangle is also referred to as a wedge formation in chart pattern
analysis. There are also two types of diagonal triangles. Leading diagonal triangles
occur in impulse waves 1 and also in wave A of a corrective zigzag, whereas end-
ing diagonal triangles sometimes occur in impulse waves 5 and in wave C of a
corrective zigzag. See Figure 18.4.
