How to use Elliott waves INSTEAD of chart patterns?

Hello, my dear friends and happy New Year!
I wish you to be healthy and reach all your goals in trading and not only! Never give up on this difficult way which we are going to overcome together!

Today we have a very important topic. How to use Elliott waves instead of classical chart patterns. This is the natural exposure why the chart patterns are garbage. I remember my third year at university when we have the trading lessons. Our teacher gave us a lot of useless knowledges about support, resistance and chart patterns. I have not understood why it should working and it was not soo intereting subject for me. That’s why I returned back to trading much later using self-education. Now I have the clear understanding why Elliott waves is the best tool and why it’s working. Most of traders even don’t understand that chart patterns is just the special case of Elliott waves. That’s why today I decided to explain you how you can change the first one to the second one. Let’s go!

Double Top(Bottom)

On the chart above I drew the different types of double tops. Generally we have 3 types of this pattern

  1. Double top with the second top higher than the first one. In this case we can interpret it in two ways. It could be the classical waves 3, 4, 5 and the corrective wave A at the ending stage. In this case we can anticipate waves B and C. Also it could be the irregular correcton ABC inside wave 4 (rarely in wave 2). In this case we should wait for the wave 5 after that. Traders usually execute short position on the neckline breakdown and suffer when the wave 5 smashed their stop-loss. They are wondering why double top does not working.
  2. Double top with the equal highs has the same possible outcomes. The only one difference that correction called flat instead of irregular.
  3. Double top with the second top lower than the first one. Here is the most common variant is the end of the ABC correction. In this case we have the low potential for shorting the market becuase the new impulsive wave to the upside can hit all stop losses.
Figure 1. H&S and triangles representation in the wave theory.

Head & Shoulders

This is the easiest pattern for analysis. The right sholder usually is the wave 4, the head, obviously is the wave 5 and the right shoulder is the wave B. On the neckline breakdown we have the shorting potential only in the rest part of the wave C. You could correctly count waves and short that the bearish reversal bar of the wave 5 or, as a last resort, at wave B potential top. Shorting at the neckline has sence only if you are sure that the wave B was the the wave 1 of the impulsive wave to the downside if higher degree and now the market is in wave 3. We have to learn how to count waves in a correct way. I would recommend you to read the Trading Chaos book by Bill Williams because it has the best explanation how do waves work.

Triangles and Wedges

This part is common for all types of triangles (ascending, descending, symmetrical) and wedges (falling and rising). This patterns have the similar structure. If we faced with one of these patterns we have 4 possible scenarios.

  1. Triangle in the downtrend after the wave 3. In this case triangle is the wave 4, which is represented as the triangle correction. This correction type consists of 5 waves A, B, C, D and E. When the wave E is finished market will continue it’s move in the direction of a trend, printing the wave 5.
  2. The same, but in the uptrend.
  3. When the market showed us the 5 waves cycle to the upside and the correction is in progress. Triangle can appears in the wave B. In this case the price will continue the corrective move in the wave C after it’s finished.
  4. The same with the downtrend.

Guys, of course there are much more types of chart patterns. For example, tripple tops and bottoms and so on. The purpose of this article is giving you another view of the market structure and to motivate you studying the Elliott waves theory. Believe me, it has much more potential than it seems on the first glimplse.

Best regards, Ivan

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