You may have guessed that the key to using Elliott wave theory in trading is whether the wave can be correctly identified.

As your ability to identify wave patterns continues to improve, you will be able to make self-judgments about whether you should go long or short.

When recognizing waves, there are three extremely important rules that we need to master. Therefore, before you apply Elliott Wave Theory to your trading, you must pay attention to the following three rules.

Failure to correctly identify waves may cause a devastating blow to your account.

3 important rules of Eliot wave theory

• Rule 1: The third wave is never the shortest wave;
• Rule 2: The second wave can never exceed the starting point of the first wave;
• Rule 3: Wave 4 will never enter the price range of Wave 1.

In addition to the above three important rules, there are also some guiding points that can help you identify waves correctly. Unlike the above three important rules, these guidelines are not necessarily true. They are:

• The first wave can be a guide wedge, but it is quite rare;
• The second wave is usually a zigzag structure (Zigzag);
• Compared with the first wave, the running time of the second wave is usually shorter, but the time of the second wave is usually longer than 10% of the running time of the first wave;
• The second wave generally withdraws more than 30% of the first wave (including all internal data points);
• The second wave usually withdraws less than 80% of the first wave;
• The retracement of the second wave most favors 50% or 61.8% of the first wave;
• The total operation amount of the second wave is usually greater than the total operation amount of the second sub-wave of the first wave, the fourth sub-wave of the first wave, the second sub-wave of the third wave and the fourth sub-wave of the third wave;
• If the total operation of the second wave is withdrawn 33%-40.3% of the first wave, then it is highly likely that the second wave will end;
• In price, the third wave is rarely shorter than the first wave;
• The price range of the third wave is usually between 1.5 and 3.5 times the price range of the first wave;
• The time of the third wave is usually between 1-4 times of the time of the first wave;
• The fourth wave can be a zigzag structure (Zigzag), but it is quite rare;
• It is common for the fourth and second waves to operate at fairly close price ranges;
• Wave 4 most often withdraws over 20% of Wave 3 (including all internal data points);
• The fourth wave often withdraws 38.2% of the third wave;
• The fourth wave does not often withdraw 50% or more of the third wave;
• The fourth wave often retreats to the price area of ​​the fourth sub-wave of the first wave of the previous level;
• The fourth wave often retreats to the end of the fourth wave of the previous level;
• Waves 2 and 4 often alternate between zigzag and flat (Flat), and another alternation is triangular and flat;
• The total operation of the fourth wave should be greater than the total operation of the second sub-wave of the third wave, the fourth sub-wave of the third wave, the second sub-wave of the fifth wave, and the fourth sub-wave of the fifth wave;
• Expect the running time of the fourth wave to be between 100%-270% of the running time of the second wave;
• The 5th wave usually exceeds the end of the 3rd wave;
• When the fifth wave is extended (that is, it is longer than 161.8% of the first wave and the third wave), a certain point in the fourth wave often divides the entire driving wave into 1.618;
• If the fifth wave is extended (that is, it is longer than 161.8% of the first wave and the third wave), its price is usually 161.8% of the beginning of the first wave to the end of the third wave;
• The fifth wave is not usually longer than the entire third wave in terms of price or time ratio;
• The price trend of the fifth wave is the most inclined: 61.8% of the first wave, 100% of the first wave, 161.8% of the first wave, 161.8% of the starting point of the first wave to the end of the third wave;
• If the third wave is equal to 161.8% of the first wave in price, then the most common is that the time of the fifth wave is equal to the time of the first wave;
• Generally, there will be an impulse wave (the first wave, the third wave, the fifth wave) appear to extend (at least 161.8% of the other longest wave);
• The most common extension is the third wave. However, in a leveraged market, if the main trend is upward, it tends to extend the fifth wave;
• The volume of the non-extended fifth wave is usually smaller than the third wave; but when the fifth wave is extended, the volume of the fifth wave is usually larger;
• The fifth wave, when it ends, usually has a smaller slope than the third wave. But in a leveraged market, if the main trend is upwards, this is usually not the case;
• In time, the fifth wave is usually less than four times the third wave.