5 TYPES OF ELLIOTT WAVE PATTERNS
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Hello traders, today we will talk about 5 TYPES OF ELLIOTT WAVE PATTERNS
( FIRST SOME BASIC INFO )
What is Elliott Wave Theory?
The Elliott Wave Theory suggests that stock prices move continuously up and down in the same pattern known as waves that are formed by the traders’ psychology.
The theory holds as these are recurring patterns, the movements of the stock prices can be easily predicted.
Investors can get an insight into ongoing trend dynamics when observing these waves and also helps in deeply analyzing the price movements.
But traders should take note that the interpretation of the Elliot wave is subjective as investors interpret it in different ways.
(KEY TAKEAWAYS)
The Elliott Wave theory is a form of technical analysis that looks for recurrent long-term price patterns related to persistent changes in investor sentiment and psychology.
The theory identifies impulse waves that set up a pattern and corrective waves that oppose the larger trend.
Each set of waves is nested within a larger set of waves that adhere to the same impulse or corrective pattern, which is described as a fractal approach to investing.
Before discussing the patterns, let us discuss Motives and Corrective Waves:
What are Motives and Corrective Waves?
The Elliott Wave can be categorized into Motives and Corrective Waves:
1. Motive Waves:
Motive waves move in the direction of the main trend and consist of 5 waves that are labelled as Wave 1, Wave 2, Wave 3, Wave 4 and Wave 5.
Wave 1, 2 and 3 move in the direction of the main direction whereas Wave 2 and 4 move in the opposite direction.
There are usually two types of Motive Waves- Impulse and Diagonal Waves.
2. Corrective Waves:
Waves that counter the main trend are known as the corrective waves.
Corrective waves are more complex and time-consuming than motive waves. Correction patterns are made up of three waves and are labelled as A, B and C.
The three main types of corrective waves are Zig-Zag, Diagonal and Triangle Waves.
Now let us come to Elliott Wave Patterns:
In the chart I have mentioned 5 main types of Elliott Wave Patterns:
1. Impulse:
2. Diagonal:
3. Zig-Zag:
4. Flat:
5. Triangle:
1. Impulse:
Impulse is the most common motive wave and also easiest to spot in a market.
Like all motive waves, the impulse wave has five sub-waves: three motive waves and two corrective waves which are labelled as a 5-3-5-3-5 structure.
However, the formation of the wave is based on a set of rules.
If any of these rules are violated, then the impulse wave is not formed and we have to re-label the suspected impulse wave.
The three rules for impulse wave formation are:
Wave 2 cannot retrace more than 100% of Wave 1.
Wave 3 can never be the shortest of waves 1, 3, and 5.
Wave 4 can never overlap Wave 1.
The main goal of a motive wave is to move the market and impulse waves are the best at accomplishing this.
2. Diagonal:
Another type of motive wave is the diagonal wave which, like all motive waves, consists of five sub-waves and moves in the direction of the trend.
The diagonal looks like a wedge that may be either expanding or contracting. Also, the sub-waves of the diagonal may not have a count of five, depending on what type of diagonal is being observed.
Like other motive waves, each sub-wave of the diagonal wave does not fully retrace the previous sub-wave. Also, sub-wave 3 of the diagonal is not the shortest wave.
Diagonals can be further divided into the ending and leading diagonals.
The ending diagonal usually occurs in Wave 5 of an impulse wave or the last wave of corrective waves whereas the leading diagonal is found in either the Wave 1 of an impulse wave or the Wave A position of a zigzag correction.
3. Zig-Zag:
The Zig-Zag is a corrective wave that is made up of 3 waves labelled as A, B and C that move strongly up or down.
The A and C waves are motive waves whereas the B wave is corrective (often with 3 sub-waves).
Zigzag patterns are sharp declines in a bull rally or advances in a bear rally that substantially correct the price level of the previous Impulse patterns.
Zigzags may also be formed in a combination which is known as the double or triple zigzag, where two or three zigzags are connected by another corrective wave between them.‘
4. Flat:
The flat is another three-wave correction in which the sub-waves are formed in a 3-3-5 structure which is labelled as an A-B-C structure.
In the flat structure, both Waves A and B are corrective and Wave C is motive having 5 sub-waves.
This pattern is known as the flat as it moves sideways. Generally, within an impulse wave, the fourth wave has a flat whereas the second wave rarely does.
On the technical charts, most flats usually don’t look clear as there are variations on this structure.
A flat may have wave B terminate beyond the beginning of the A wave and the C wave may terminate beyond the start of the B wave. This type of flat is known as the expanded flat.
The expanded flat is more common in markets as compared to the normal flats as discussed above.
5. Triangle:
The triangle is a pattern consisting of five sub-waves in the form of a 3-3-3-3-3 structure, that is labelled as A-B-C-D-E.
This corrective pattern shows a balance of forces and it travels sideways.
The triangle can either be expanding, in which each of the following sub-waves gets bigger or contracting, that is in the form of a wedge.
The triangles can also be categorized as symmetrical, descending or ascending, based on whether they are pointing sideways, up with a flat top or down with a flat bottom.
The sub-waves can be formed in complex combinations. It may theoretically look easy for spotting a triangle, it may take a little practice for identifying them in the market.
Bottomline:
As we have discussed above Elliott wave theory is open to interpretations in different ways by different traders, so are their patterns. Thus, traders should ensure that when they identify the patterns.
This chart is just for information
Never stop learning
I would also love to know your charts and views in the comment section.
Thank you
( FIRST SOME BASIC INFO )
What is Elliott Wave Theory?
The Elliott Wave Theory suggests that stock prices move continuously up and down in the same pattern known as waves that are formed by the traders’ psychology.
The theory holds as these are recurring patterns, the movements of the stock prices can be easily predicted.
Investors can get an insight into ongoing trend dynamics when observing these waves and also helps in deeply analyzing the price movements.
But traders should take note that the interpretation of the Elliot wave is subjective as investors interpret it in different ways.
(KEY TAKEAWAYS)
The Elliott Wave theory is a form of technical analysis that looks for recurrent long-term price patterns related to persistent changes in investor sentiment and psychology.
The theory identifies impulse waves that set up a pattern and corrective waves that oppose the larger trend.
Each set of waves is nested within a larger set of waves that adhere to the same impulse or corrective pattern, which is described as a fractal approach to investing.
Before discussing the patterns, let us discuss Motives and Corrective Waves:
What are Motives and Corrective Waves?
The Elliott Wave can be categorized into Motives and Corrective Waves:
1. Motive Waves:
Motive waves move in the direction of the main trend and consist of 5 waves that are labelled as Wave 1, Wave 2, Wave 3, Wave 4 and Wave 5.
Wave 1, 2 and 3 move in the direction of the main direction whereas Wave 2 and 4 move in the opposite direction.
There are usually two types of Motive Waves- Impulse and Diagonal Waves.
2. Corrective Waves:
Waves that counter the main trend are known as the corrective waves.
Corrective waves are more complex and time-consuming than motive waves. Correction patterns are made up of three waves and are labelled as A, B and C.
The three main types of corrective waves are Zig-Zag, Diagonal and Triangle Waves.
Now let us come to Elliott Wave Patterns:
In the chart I have mentioned 5 main types of Elliott Wave Patterns:
1. Impulse:
2. Diagonal:
3. Zig-Zag:
4. Flat:
5. Triangle:
1. Impulse:
Impulse is the most common motive wave and also easiest to spot in a market.
Like all motive waves, the impulse wave has five sub-waves: three motive waves and two corrective waves which are labelled as a 5-3-5-3-5 structure.
However, the formation of the wave is based on a set of rules.
If any of these rules are violated, then the impulse wave is not formed and we have to re-label the suspected impulse wave.
The three rules for impulse wave formation are:
Wave 2 cannot retrace more than 100% of Wave 1.
Wave 3 can never be the shortest of waves 1, 3, and 5.
Wave 4 can never overlap Wave 1.
The main goal of a motive wave is to move the market and impulse waves are the best at accomplishing this.
2. Diagonal:
Another type of motive wave is the diagonal wave which, like all motive waves, consists of five sub-waves and moves in the direction of the trend.
The diagonal looks like a wedge that may be either expanding or contracting. Also, the sub-waves of the diagonal may not have a count of five, depending on what type of diagonal is being observed.
Like other motive waves, each sub-wave of the diagonal wave does not fully retrace the previous sub-wave. Also, sub-wave 3 of the diagonal is not the shortest wave.
Diagonals can be further divided into the ending and leading diagonals.
The ending diagonal usually occurs in Wave 5 of an impulse wave or the last wave of corrective waves whereas the leading diagonal is found in either the Wave 1 of an impulse wave or the Wave A position of a zigzag correction.
3. Zig-Zag:
The Zig-Zag is a corrective wave that is made up of 3 waves labelled as A, B and C that move strongly up or down.
The A and C waves are motive waves whereas the B wave is corrective (often with 3 sub-waves).
Zigzag patterns are sharp declines in a bull rally or advances in a bear rally that substantially correct the price level of the previous Impulse patterns.
Zigzags may also be formed in a combination which is known as the double or triple zigzag, where two or three zigzags are connected by another corrective wave between them.‘
4. Flat:
The flat is another three-wave correction in which the sub-waves are formed in a 3-3-5 structure which is labelled as an A-B-C structure.
In the flat structure, both Waves A and B are corrective and Wave C is motive having 5 sub-waves.
This pattern is known as the flat as it moves sideways. Generally, within an impulse wave, the fourth wave has a flat whereas the second wave rarely does.
On the technical charts, most flats usually don’t look clear as there are variations on this structure.
A flat may have wave B terminate beyond the beginning of the A wave and the C wave may terminate beyond the start of the B wave. This type of flat is known as the expanded flat.
The expanded flat is more common in markets as compared to the normal flats as discussed above.
5. Triangle:
The triangle is a pattern consisting of five sub-waves in the form of a 3-3-3-3-3 structure, that is labelled as A-B-C-D-E.
This corrective pattern shows a balance of forces and it travels sideways.
The triangle can either be expanding, in which each of the following sub-waves gets bigger or contracting, that is in the form of a wedge.
The triangles can also be categorized as symmetrical, descending or ascending, based on whether they are pointing sideways, up with a flat top or down with a flat bottom.
The sub-waves can be formed in complex combinations. It may theoretically look easy for spotting a triangle, it may take a little practice for identifying them in the market.
Bottomline:
As we have discussed above Elliott wave theory is open to interpretations in different ways by different traders, so are their patterns. Thus, traders should ensure that when they identify the patterns.
This chart is just for information
Never stop learning
I would also love to know your charts and views in the comment section.
Thank you
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Hello traders, today we will talk about Trading Psychology
The most famous book on trading psychology , “Tradingpsychologie” aptly remarks, ‘The greatest enemy of the trader is fear. He who is afraid loses!’.
As a trader, you must have gone through emotions such as fear, greed, regret, hope, overconfidence, doubt, nervousness etc.
While every trader goes through this emotional rollercoaster, a successful trader knows that it’s never a good idea to let your emotions influence your investment decisions.
Not letting your emotions affect your trading decisions is the real meaning of trading psychology!
In this article, we will educate you on the meaning of trading psychology . We will also reveal trading tips and tricks to mentally prepare you to trade with confidence!
So, let’s begin!
What is Trading Psychology?
Trading psychology or investor psychology refers to the trader’s emotional and mental state which dictates their trading actions.
Some of these emotions like hope, confidence are helpful and should be embraced. But emotions like fear and greed must be contained. Another emotion that is very common in financial markets is the fear of missing out or FOMO.
It is essential to understand and develop a sharp mindset along with knowledge and experience to become a successful trader.
Let us take a look at the various psychological factors that affect a trader’s mindset and some pro-tips to deal with them.
1. Fear
Fear is a natural reaction that we sense when something is at risk. While trading, risks could occur in many forms –
Some bad news about the stocks or the market
Placing a trade and realising it’s not going the way you had hoped
Fear of loss of capital
Traders generally overreact and tend to liquidate their holdings because of fear. A strong trading psychology is when traders do not let fear dictate their buy/sell strategy.
What should you do?
Every trader must first understand what they are afraid of and why? Reflect on these issues ahead of time so you can quickly identify the problem and find a solution. Your focus should be to not let the fear of loss refrain you from making profit.
2. Greed
Greed enters when you desire excess profits. Rome was not built in a day and neither will your stock market fortune. If you find yourself on a winning streak, then book your profits and move on. Majority of the time, your greed will turn a winning streak into a disaster!
What should you do?
To combat greed, you should have a predefined profit booking level. Even before you enter a trade, define your stop-loss and book-profit levels to avoid being swayed by greed.
A sound trading psychology is when you are content with your profits and do not chase irrational profits.
3. Regret
Regret in trading comes in two ways.
A trader could regret placing a trade that didn’t work or
Regret not placing a trade that could have worked.
A trading psychology based on regret can be dangerous for a trader as it may result in placing wrong trades.
What should you do?
The best way to avoid a regretful trading psychology is to accept that you can’t have all the opportunities in the market. The equation in the stock markets is very simple – You win some; you lose some.
Once you accept this rule, your trading psychology will automatically change for the better.
4. Hope
Investors often think that trading is gambling. It’s because they hope to win all the time and when they don’t, they get dejected.
What should you do?
To become a successful trader, you must have a solid trading psychology which is not dependent on hope. If you keep hoping for things to change in the near future, you’re putting your entire investment at risk.
Don’t let hope keep you invested in a loss making trade. Be practical, and book your losses at the correct time.
To attain and maintain success as a trader, you have to work hard to cultivate a mindset! Let’s see how trading psychology helps you cultivate a better mindset!
How to Improve Your Trading Psychology
1. Get Yourself in the Right Mindset
Before you even start your trading day, simply remind yourself that markets are never constant. You will have some good days and some bad days, but the bad days too shall pass.
Another effective strategy to improve your trading psychology is to give yourself time. You are not going to make a fortune on your very first trading day. You need to spend time and efforts in creating a rock solid trading strategy which isn’t affected by the market sentiments.
While you cannot completely eliminate emotions from trading, the goal is to reduce the extent of emotions controlling your trading psychology .
2. Have a Great Knowledge Base
One of the best ways to improve your trading psychology is to increase your knowledge and trading skills. Having a strong knowledge base of the stock market is key to defeating negative trading psychology . Remember, knowledge is power!
3. Remind yourself that you are Trading in Real Money
When you’re trading online, it’s easy to forget that the numbers on your screen actually represent real money. There’s nothing wrong in risking your money in hopes of generating returns. But remember to be cautious and make smarter investment decisions.
4. Observe the Habits of Successful Traders
Stock market is unique because it treats each trader differently. When it comes to trading, you should be aware of what your peers are doing, not to copy them but to learn from them.
By observing the positive characteristics of successful traders and inculcating few habits or strategies into your own trading, you can improve your trading strategies manyfolds.
5. Practice! Practice! Practice!
Last but not the least, practice is the best and most reliable way to gain mental strength. It helps you improve your trading psychology over time as you build well practised trading strategies and are well prepared for any ups or downs.
Final Thoughts
Understanding trading psychology and implementing it is a time consuming process. You have to continuously refine your trading psychology over long time periods.
To sum up, remember these three golden principles of trading psychology
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Common Reasons Why Traders Lose Money Even in an Uptrend
#Not Setting Stop-Loss:
#Not Conducting Technical Analysis:
#Going against the Trends:
#Following the Herd:
#Being Impatient:
#Not doing Homework or Research:
#Averaging on Losing Position:
Buy low sell high' is the motto. As simple as it sounds, why do most people lose money trading or investing?
There are four major mistakes that most beginners make:
1. Excessive Confidence
This stems from the idea that people think of themselves as special. They think they can 'crack the code' in the stock market that 99.9% of people fail to, and eventually make a living trading and investing. However, taking into consideration the fact that more people lose money in the market, this form of wishful thinking is the same mentality as going into a casino feeling lucky. You may actually get lucky and win big the first few times, but in the end, the house always wins.
2. Distorted Judgements
While simplicity is key, the approach most beginners make in trading and investing are too simplistic, to the extend where it's hard to even call it a trading logic or reason to invest. They spot a few reoccurring patterns within the market, and this is almost as if they discovered fire. It doesn't take long to realize that the "pattern" they spotted was never based on any solid reasoning, or worse, wasn't even a pattern at all in the first place.
3. Herding Behavior
The fundamentals of this is also deeply rooted in a gambling mindset. Beginners are attracted to the idea of a single trade or investment that will make them a millionaire. However, they fail to realize that there is no such thing. Trading and investing is nothing like winning the lottery. It's about making consistent profits that compound throughout time. While people should definitely look for assets that have high liquidity and some volatility , the get-rich-quick mentality drags irrational beginners into overextended/overbought stocks that eventually drop drastically.
4. Risk Aversion
Risk aversion is a psychological trait embedded within all of mankind's DNA. Winning is fun, but we can't tolerate losing. We tend to avoid risk, even when the potential reward is worth pursuing. As such, many beginners take extremely small amounts of profits, in fear that they might close their position at a loss, trading with a terrible risk reward ratio. In the long run, their willingness to not take any risks leads to losses.
Depending on the price action, they also go through seven phases of psychological stages:
- Anxiety
- Interest
- Confidence
- Greed
- Doubt
- Concern
- Regret
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Lack of Discipline
An intraday trader must stick to a proper plan. A full-fledged intraday plan includes profit targets, factors to consider, methods to put a stop loss, and ways to select the right trading hours. The trading plan provides a comprehensive overview of how trading should be executed. Also, you can keep a record of trades executed during the day with the performance analysis of each stock at the end of the day. Such records help you identify the weak areas in your trading strategy and correct them. It is very important to be disciplined as a trader, the proper discipline will help you minimize the losses and maintain your capital.
Not Setting Proper Trading Limits
In intraday trading, the success lies in managing the risk. You should pre-define a stop loss and profit target when entering intraday trading. This strategy itself is an important part of trading discipline and this is where most people fail. For instance, if you incur a loss in the first hour itself, you should shut down the trading terminal for the rest of the day. You should also have an overall capital loss limit in place, it will safeguard you against trading losses.
Compensating for a Rapid Loss
This is one of the common mistakes in the trading community. When a trader incurs a loss, he/she either tries to average a position or overtrades excessively to recover the loss. This further leads to a greater loss and put them into more trouble. Losses are a part of intraday trading, instead of overtrading, it is wise to accept the loss, analyze the strategy and make improvements from the next day.
Heavy Dependency on Tips
Nowadays, there are ample of intraday tips flowing everywhere on the digital media. It is a common phenomenon for a trader to rely on these external tips, however, this needs to be avoided. The best way to learn intraday trading is by gradually learning how to read charts, understanding structures, and interpreting results on your own. Many traders refrain from taking these efforts and because of this, they end up on the losing side. The Beyond App by Nirmal Bang provides deeper insights into the market, the technical research offered by Nirmal Bang is spot on. You can use that research for reference, however, nothing can beat practical experience.
Not Keeping Track of Current Affairs
The external news, events, and tragedies do have an impact on the stock market. Hence, it is important for an intraday trader to keep a track of the Indian as well as global markets. Even the performance of global markets has an impact on the movement of Indian markets. Make your trade after the news or event has been announced, do not try to speculate the market based on the news.
There are even instances when traders do not have any sound trading strategy, they just make decisions based on gut feelings or emotions. One needs to remember that intraday trading in itself is a skill, it is not a gamble, it takes time to develop proficiency, you cannot expect rapid results. The above are some of the major reasons why intraday traders lose money, ensure that you are disciplined enough, stick to a proper strategy, analyze your strategy at regular intervals, and things will fall in place.
This chart is likely to help you make better trade decisions if it does consider upvoting it.
I would also love to know your charts and views in the comment section.
Thank you
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