Elliott Wave Cycle Detailed Explanation

Elliott Wave Cycle is the base of Elliott Wave Theory or we can say it is the road map of this analysis method. You cannot counts waves without having understanding of Elliott Wave Cycle. EW cycle helps to identify the current position of price within a wave cycle, so that we can get the idea of next wave.

These are just simple wave’s rules but applicable in every pattern and in every condition. I tried to explain these simple rules with imaginary graphic images and real charts to make the concept clear and easy to understand. 

RN Elliott (The father of Elliott Wave Theory) observed that every financial market, stocks or financial instrument moves in zigzag formation and he called it Wave’s Cycles. And this zigzag formation consists of a set of 5 waves in the direction of Primary/Main trend followed by a set of 3 waves opposite to direction of main trend. 

If we look at the history of stock market, the main/primary trend is always up as the market cannot go below zero. Most of the examples covered in this article are with the uptrend (bullish trend) as main trend and down trend (bearish trend) and as corrections.

But all the 8 waves forms in both the directions, so the rules for a particular wave are absolutely same let it be in any direction.   

The set of 5 waves in the direction of main trend he called “Impulsive” or “Impulse”.

And the set of 3 waves opposite to the direction of main trend he called “Corrective” of “Correction

Rule for Numbering/Marking the waves

All the 5 waves move (Impulsive or main trend) can be marked with numbers as wave 1, 2, 3, 4, 5 or (i), (ii), (iii), (iv), (v) or any other numbers format of your choice.

3 waves move (Corrective or correction) can be marked in alphabets as A, B, C or a, b, c or any other alphabetic format of your choice.

We can use different variations of these numbers and letters to distinguish inner/lower degree waves. Suppose we marked an Impulse wave as (1), then its inner 5 waves can be marked as (i), (ii), (iii), (iv), (v) or [1], [2], [3], [4], [5] or any number format of your choice.

The aim of using different variations of numbers/letters is to distinguish different levels of waves otherwise there is no hard rule to use a particular format of number or alphabet for a particular wave.

Inner/Lower Degree Waves in Elliott Wave Cycle

Every wave consists of a set of small inner waves or we can say that a set of small waves combines to form a big wave. So, the small inner waves are called as Inner or Lower Degree Waves and biggest waves are called as Main or Higher Degree waves.

All the rules are same for a particular wave let it be a main wave or a inner wave. Suppose I am explaining the rules of wave 3, then the same rules will be applicable to every wave 3, let it be a major wave 3 or inner/lower degree waves (3), (iii), [3] or [iii].

You will understand this numbering and marking easily as we proceed further.

Just look at image (1) below, it is just a simple imaginary representation of movement of market based on Elliot Waves Theory. Just read the points and try to identify it on image.

Elliott Wave Cycle Basic Pattern
Elliott Wave Cycle Basic Pattern (Image 1)

Five waves move (impulsive) started from point (0) and completed at point (5) where,

  • Inner wave (1) started from points (0) and completed at point (1)
  • Inner wave (2) started from points (1) and completed at point (2)
  • Inner wave (3) started from points (2) and completed at point (3)
  • Inner wave (4) started from points (3) and completed at point (4)
  • Inner wave (5) started from points (4) and completed at point (5)

Thus, a whole impulse wave is completed from point (0) to (5).

After completion of Impulsive move, a three wave’s move (corrective) started from point (5) (end of impulsive) and completed at point (C) where: –

  • Inner wave (A) started from points (5) (end of impulse) and completed at point (A)
  • Inner wave (B) started from points (A) and completed at point (B)
  • Inner wave (C) started from points (B) and completed at point (C)

 

This is the basic idea of “Impulsive” and “Corrective” now we can go bit deeper into the concept for better understanding.

Internal Structure of Elliott Wave Cycle

In Elliott’s Wave Cycle, Impulsive wave is consists of Five inner waves 1,2,3,4 and 5 in the direction of main trend and corrective wave consists of Three Waves A, B and C opposite to the direction of main trend.

But if you observe the formation of Impulse (set of 5 waves up move marked as 1,2,3,4 and 5), then wave 1, 3 and 5 are in the direction of main trend but wave 2 and 4 are opposite to the direction of main trend.

Here you need to understand that within Impulsive wave,

Wave 1, 3 and 5 is also a small/inner impulse of lower degree. Means, inner wave 1, 3 and 5 in the direction of main trend are also consist of 5 smaller waves.

Wave 2 and 4 are corrective waves of lower degree. Means, inner waves 2 and 4 are opposite to the direction of main trend and consist of 3 smaller waves (a,b and c).

Thus, a combination of 3 Impulsive and 2 corrective forms a bigger impulse wave.

And Within Correctives,

Wave A and C is impulse of lowest degree which consists of 5 inner waves whereas wave B is corrective of lowest degree and consists of 3 inner waves (abc). 

Have a careful look at image (2) and try to identify Impulsive and correctives.

Elliott Wave Cycle Internal Structure
Elliott Wave Cycle Internal Structure (Image 2)

On image (2), I just broke down bigger waves into smaller/lower degree wave. Bigger wave are marked with big characters (1) (2) (3) (4) (5) and (A) (B) (C) where as lower degree/inner waves are marked as small characters (i, ii, iii, iv and v) and (a, b and c).

Read this image carefully and try to identify how I displayed waves 1, 3, 5, A and C as impulsive (5 waves moves) and wave 2, 4 and B as corrective (3 waves move).  

Continuation of Elliott Wave Cycle

We already know, every Impulse wave is a set of 5 inner waves and every Corrective wave is a set of 3 inner waves.

In the same way,

Completion of smaller set of 5 waves move is a completion of bigger Impulse followed by the start of bigger correction. Let me explain the same graphically on image (3).

Continuation of Elliott Wave Cycle
Continuation of Elliott Wave Cycle (Image 3)

Look carefully at image (3),

Small set of 5 inner waves (i, ii, iii, iv, and v) completed a wave cycle and formed bigger wave (1) and (a, b, c) correction formed wave (2).

Wave (1) and (2) started a next major Elliott wave cycle which completed after completion of wave (3), (4) and (5) [set of 5 waves].

Further, set of 5 waves [(1), (2), (3), (4), (5)] completed a higher degree formed wave [1] and further [(A), (B), (C)] correction formed higher degree wave [2].

Now, this higher degree Elliott wave cycle started with wave [1] and [2] will get completed after completion of waves [3], [4], [5] to form another higher degree wave {1} and same pattern will repeat again and again. This is never ending cycle.

Stock Market moves in this formation by completing bigger impulsive followed by bigger correction. The up move till the completion of bigger impulse (wave 1) is Bull Market and later correction (wave 2) is Bear Market followed by the start of new Bull Phase that goes well above previous high again. And the cycle goes on.

Example of Elliott Wave Cycle on Nifty Chart

The completion of bigger impulsive in 2008, most of the world’s market completed bigger Bull cycle in 2008 followed by bigger correction. Most of the major indices corrected almost 60-70-% from life time high and started new bull trend for new cycle. Have a careful look at chart on (Image 4) below.

Major Elliott wave cycle of Nifty
Major Elliott wave cycle of Nifty (image 4)

Nifty completed its major wave cycle at 6357 [wave (1)] in 2008 followed by major correction [wave (2)]. Nifty corrected whole life move by more than 70% after completion of wave (1). The bounce till 6357 was bull phase and correction till 2252 was bearish phase or crash.

I marked major wave Cycle completed at 6357 as major wave (1) and correction as major till 2252 as wave (2), major wave (3) completed at 12430, (4) completed at 7511 and last wave (5) is in progress.

I also marked inner waves of major wave (3) on this chart but it will be difficult for you to understand at this point of time, so just take it as example of wave cycle and try to understand it after reading the whole book.

Now, Nifty needs to complete wave (5) to complete next major wave cycle before any further crash like 2008. Let’s me give a visual example on same Nifty chart by drawing imaginary lines to show how this ongoing major wave cycle would complete.

Have a careful look at (Image 5)

Future Move of Nifty based on Elliott Wave Cycle
Future Move of Nifty based on Elliott Wave Cycle (Image 5)

This is general expected road map of Nifty to complete ongoing wave cycle.

Here, I tried to explain that,

Major wave (1), (2), (3), (4) is completed and last wave (5) is in progress from 7511.

Major wave (5) can complete somewhere in 14713-19166 range and there will be completion of next major wave [1] with the completion of wave (5). Wave (1), (2), (3), (4), (5) will form major wave [1].

After completion of next major wave [1], there will be major downside correction as wave [2] (major correction or bear market).

Wave [2] will be a set of 3 inner waves (A), (B) and (C). Within wave [2],

  • Wave (A) will be impulse with (i), (ii), (iii), (iv), (v) as inner waves.
  • Wave (B) will be Corrective with (a), (b) and (c) as inner waves.
  • Wave (C) will be impulse with (i), (ii), (iii), (iv), (v) as inner waves.

 

I marked waves using different number formats to distinguish different degree of waves. I tried to explain how a set of lower degree waves completes a higher degree wave and how we can use different number formats to mark waves of different degree.

Please read the chart carefully and try to understand the formation of wave cycle. Read step by step and focus on waves marked with similar number format to understand its inner composition.

Don’t focus on logic because it will be difficult for you to understand the reasons and rules behind these waves counting right now. You will be able to understand the logics behind these wave counts after know Elliott wave personalities, patterns and Fibonacci Calculations. Now, just focus on understanding the concept of Wave Cycle.

Basic Rules of Elliott's Wave Cycle

The basic concept of wave’s cycles of Elliott wave theory is already explained and now is the time to know 3 basic rules applicable on waves. I am not explaining every rule and condition here in this topic but just stating three basic principles to remember.

You learnt that Elliott wave cycle is a set of 5 waves upside followed by 3 waves downside but there must be some rules to justify these wave counts. You can’t start marking wave 1,2,3,4,5,A,B,C anywhere, there must be some rules which justify or confirm these wave counts.

There are many rules, calculations and patterns to justify accurate wave counts in different conditions (we are going to read about everything later) but these 3 basic rules are mandatory and applicable in all conditions.

  1. Wave 2 can never correct more than 100% of wave 1, i.e. Wave 2 can never go below the start of wave 1.
  2. Wave 3 can never be the shortest impulse wave in full 5 wave’s cycle. Means, wave 3 can never be shorter than both 1 and 5.
  3. Wave 4 cannot overlap wave 1, i.e wave 4 cannot go below the end of wave 1. There is exceptions in this rule and will be explained in later chapters.

 

These rules are not everything about Elliott Wave’s Theory but these three simple rules are backbone of EWT which you can’t ignore. These rules will help you a lot in identifying patterns, predicting levels and taking low risk entries in market for high profit.

Marking the Start of Major Elliott Wave Cycle

I started wave counting from point ‘0’ in most of the imaginary examples in this book. Point ‘0’ indicates the “start of a wave cycle” in imaginary examples because we don’t have a particular price point, otherwise “All Time Low” of any script is “start of major Elliott’s wave cycle”.

So, life time low of any particular stock or index is actually point ‘0’. Otherwise every inner wave starts with the end of previous wave.

Some stocks crashes after completing a wave cycle to register new life time low. So, when a stock registers its fresh life time low then all its previous waves becomes invalid and new major wave cycle starts from new life time low.

Let me explain the same on chart. Please refer (Image 6) below.

Marking the start of major Elliott wave cycle
Marking the start of major Elliott wave cycle (Image 6)

This is monthly chart of Capital First (CAPF) covering its life time of move. This stock listed above 1000 but declined to register its life time low 91 in 2012-2013. Later, it completed one major wave cycle from 91 to 901 as marked on chart.

So, its major wave cycle is started from 91 and same we can mark as point (0). And all the wave formations and patterns formed before this life time low are of no use.

Because all previous journey of a stock becomes invalid after breaking below its life time low and new wave cycle starts from fresh low with new perspective and new personality.

Practical Application of Elliott Wave Principle
Deepak Kumar, Elliott Wave Theory Analyst

About Deepak Kumar

An independent Elliott Wave Theory analyst, trainer and trader. Analyzing Indian Indices and stocks since 2011. Founder of “Sweeglu Elliott Waves” and author of most practical book on Elliott Wave Theory, “Practical Application of Elliott Wave Principle”

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