Elliott Wave Personality carries importance in Elliott Wave analysis because it helps to confirm the accuracy of wave counts in tough conditions. Understanding of Personalities or behavior of waves can help to get out of confusion of Alternate wave counts.
There are total 8 waves in Elliott Wave Cycle and out of these 8 waves, understanding the personality of wave (3) is most important for every Elliott Wave Theory analyst.
I am writing short notes on personalities of every wave one by one.
Wave 1 generally doesn’t carry any particular personality or characteristics and we don’t need to give much importance to it.
Wave (1) is just like a newly born child, as we can’t understand its behavior. Wave (1) of main cycle can take months and even years to form.
We must wait for the completion of wave (1) and (2) for efficient Elliott Wave Analysis.
Elliott Wave 2 starts with the end of wave 1 when investors and traders start booking profit after a big bull rally.
Wave 2 is generally a period of bear phase/recession/consolidation when profit booking at higher levels followed by accumulation at lower levels is going on and it is the time when market decides where it wants to go in near term.
It is a corrective wave and corrective waves are mostly confusing because it can have one out of four corrective. So, it is advised to avoid trading during progress of wave (2).
Elliott Wave 3 is most important and most focused wave among the entire waves. Elliott Said, “Wave 3 can make you rich if you manage to catch it” because of its personality.
So, understanding the personality of wave 3 is important for every Elliott Wave Theory analyst.
Wave 3 starts with the end of wave 2 when correction for wave 1 is completed.
Start of wave 3 is the time when majority of investors and traders are convinced that previous trend (Short term or long term) had changed and now is the start of new bigger trend.
Elliott Wave 3 is normally steeper, sharper, faster and largest of all waves with formation of gaps in between because investors and traders are fully confident of the trend and they want to buy/sell at any levels especially when wave 3 crosses above the end of wave 1 (start of wave 2).
Wave 3 is always faster and creates gaps because buyers don’t wait and want to buy at any price and stop losses of seller’s triggers.
The experience says, we should not estimate the top of wave 3 and we should not book profit during the progress of wave 3, trailing stoploss at upper levels is best strategy to get maximum profit.
The trader who tries to chase (trade against the direction) wave 3 often get penalized. The sharp and fast move of wave 3 makes it difficult to identify its inner wave formation, which further makes it impossible to calculate its top.
Trading Volume increases and most of short term chart, technical indicator, RSI etc shows market in overbought/oversold state during the progress of wave 3 but it doesn’t stop even in highly overbought/oversold state.
I explained personality of wave (3) later also after explaining all the rules of EWT for better understanding.
Look carefully at wave (3) and (iii) on chart in Image 1. Wave (3), inner wave (iii) of (3) and inner wave (iii) of (5) is fastest and longest among all waves.
Elliott Wave (4) carries the same personality and characteristics as wave (2).
Smart investors who bought at start of wave (3), starts booking maximum profit.
But those who missed or were not confident at lower levels starts buying during the progress wave (4) because they are now convinced that price will move higher after seeing the furious move of wave (3).
So wave (4) is also a time of consolidation after a very Sharp and Big move of Wave (3) because profit booking at higher levels and buying at lower levels continues for some time.
Elliott Wave 5 is a last leg of main trend which is often confusing and can ends diagonally sometimes.
It is almost difficult to predict the top of 5th unless you are experienced because it either ends diagonally or its inner waves follow rare calculations.
Wave 5 mostly driven by new/weak/common traders and investors who are now convinced that the stock is in extreme Bull Run and going to rise higher after seeing a previous sharp run of wave 3.
Most of the new investors/traders buy at top of wave 5 and often get penalized.
During wave 5, price of stocks/instrument rise sharply but with very low volumes, (lower than average volume) this is also the indication of trend reversal.
Wave A is an impulse which carries the same characteristics and personality of wave 1.
It is often slow as traders/investors are not yet fully convinced of trend and starts booking profit slowly seeing a break after a good rally.
But wave A can also be sharp if it is after a highly extended wave 5.
Wave B also carries same characteristics as wave 2. It is a period of consolidation when there is tug of war between buyers and sellers.
Investors/Traders who are still in hope of further upside keep on buying on dips and those who bought at lower levels keep booking profit.
Wave B plays very important role in predicting how much overall correction may be and how much next up move may be.
Wave B is a corrective wave for wave A and most confusing wave because wave (B) have no minimum/maximum retracement limit (will be explained later).
Wave C plays very important role in EWT (Elliott’s Wave Theory) because it is last wave of correction and there is always a start of new impulsive after completion of C.
So, if you are able to identify wave the end of wave C, you can catch next impulsive for Big-Big profit.
Wave C is always have Impulse Pattern like wave (3) `and is a last leg of a correction.
Wave C is normally faster than A and B as it is the time when majority of traders/ investors are convinced that last upside rally has ended. So they start booking profit immediately as soon as wave B completes.
Wave C is often sharp and faster because majority of traders starts booking profit on bounce of wave B and stop losses of buyer’s triggers.
Wave C somewhere resembles wave 3. Wave C can be destructive sometimes to hit many stop losses and results in heavy quick losses.
But C can also be slower in some cases if wave A was sharper and faster.
Wave C is actually the end of ongoing correction followed by a reversal. So, it is faster most of the times and often scares traders before reversal.
Please look carefully at chart on (Image 1) and try to compare of personalities of Elliott waves.
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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