Having spoken about Elliott waves for quite some time now it is time to talk about the rules that we might stumble upon while using this theory. And there are three main rules with them.
Although before naming the rules it is important that I name 1 condition – it is necessary to see and understand what market and what wave you are currently trading. although that is both the condition to understand the rule and one of the things that the rules are going to help you understand.
So, here are the three rules of Elliott waves:
Wave 3 can NOT be the shortest wave;
Wave 2 can NOT go beyond the start of Wave 1;
Wave 4 can NOT cross the same closing price area as Wave 1.
That being said, I will state that wave 3 is almost always long, sharp and extended. And wave 2 and 4 usually bounce off Fibonacci retracement levels. Wave 5 doesn’t always move beyond the level of wave 3, although it does go beyond the trend line set by the wave 3.
That is it – short and precise description of the Elliott waves. Doesn’t seem so hard now, does it?