Personalities of Elliott’s waves are nothing but nature and behavior of waves. I explained the concept of Elliott’s Wave cycle in my previous article and I am going to explain the personalities of every single wave of this wave’s cycle.
- Concept of Elliott Wave Theory Explained with Examples – Wave’s Cycle
- Why You Must Learn Elliott Wave Analysis from Deepak Kumar
You must have read many articles and lessons about Elliott’s wave counts but not much about the nature of every single wave. Understanding the wave’s personalities will show you the actual reality of stock market. You will not talk about manipulation, operator trap or false move types of things after understanding personalities of waves. You must have some doubts in your mind like:
- Why market/stocks rise continuously without break even if all other technical indicators are highly overbought.
- Why market/stocks fall suddenly and heavily when most technical indicators/fundamentals are highly bullish and rise suddenly when majority is bearish.
- How to identify sudden fall, sudden rise, sudden up down swings and range bound sessions in advance.
Answer for all of your doubts lies within “Personalities of waves”. But you need to understand Wave’s Cycle completely before understating the personalities of wave.
We already know that there are only 8 waves ( 1,2,3,4,5 and A,B,C) in Elliott’s wave theory which comes to play again and again let it be on smaller time frame or higher time frame time frame.
But, knowing the wave’s cycle and principles only will not help you to take trading and investment decisions. Every single wave carries different personality and has different calculation. And personality and calculation of every wave is related to the personality of previous waves. It is the personality of waves which is going to help you in confirming your wave counts and to predict the nature of next move.
So, in this chapter I am explaining personality of each wave one by one in sequence starting from wave 1.
Personalities of Wave 1
Remember, any wave 1 or impulsive may be a part of any higher degree or highest degree impulsive or corrective wave. It may be a part of wave 1 or 3 or 5 or A or C or any lower degree wave of it.
- Wave 1 generally doesn’t carry any particular personality and characteristics and we don’t need to give much importance about its calculations.
- Wave 1 is an impulsive and consists of 5 inner waves which can also progress as “Leading Diagonal Triangle” (explained later about Leading Diagonal Triangle).
- Wave 1 is usually smaller than 3 and 5.
- Wave 1 usually slower if it is after a long bearish trend. It progress slowly and steadily and try to make base as majority of traders/investor are not so confident to take positions. It grows in confusion and may take weeks or months or even years if it is after a long down trend.
- Wave 1 may be faster if it is after a long sudden spike especially when it is a lower degree wave 1 of bigger wave 3. But wave 1 is mostly slower than its proceeding wave 3
- There is no particular way to calculate wave 1 in advance but you can estimate it by counting its inner waves (explained later).
Just see the chart (3.1) of “Axis Bank” given below and observe that wave 1 is smaller and slower than wave 3. Don’t try to see other presentation on chart, it may confuse you. Just see the personality of wave 1 how it progressed slowly and it is the smaller wave as compare to wave 3 and 5. Now, just concentrate on wave 1 marked as red digit 1 from point 0-1 (369.05-383.15)
We don’t give much importance to wave 1 and we must wait till its completion as it carries variable characteristics.
Personalities of Wave 2
Wave 2 starts after end of wave 1 when the investors/traders start booking profit who bought at start of wave 1. Actually, when Elliott discovered this principle that time markets were not so aggressive, there was only simple phenomena, “Buying at lower price and selling at higher price” there limited number of investors and traders. So he explained only Buying at lower levels at Selling at higher levels. As selling was only profit booking at that time.
But in present Stock Market, Profit booking is also accompanied by Heavy Short Selling so waves are now faster and aggressive as compared to old stock market but waves follows same rules.
So wave 2 starts at end of wave 1 when investors and traders starts booking profit and it corrects almost 61% percent of wave 1 in normal cases but doesn’t break below the start of wave 1 (wave 2 never corrects more than 100% of wave 1). 61% correction I said in normal cases but the correction of wave 2 can be as small as 23%-38% of wave 1 and as long as 99% of wave in some cases.
- Wave 2 normally corrects 61% (50%-70%) of 1 in most of the cases because majority of investors and traders are still not confident about the change of bigger trend. So, they book profit of most of their holding bought during progress of wave 1.
- Wave 2 is a set of 3 wave’s correction A, B and C (Characteristics of waves A, B, C and types of corrections are explained in later chapters).
- Wave 2 is generally a period of 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.
You can predict more accurate levels for wave 2 by identifying its inner waves (abc).
Just see the chart (3.1) above to observe the personality of wave 2 (from point 1-2, 383.15-371, marked in red digits). There you will observe wave 2 corrected more than 70% of wave 1 but not more than 100%. Wave 2 ended above the start of wave 1.
Personalities of Wave 3
Wave 3 is most important and most focused wave among the entire waves. Wave 3 can make you rich if you manage to catch it and you are going to know in later chapters that why I am saying so and why wave 3 is most important.
- Wave 3 starts at 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 (Short term or long term) has changed and now is the start of new bigger trend.
- Wave 3 can never be shorter wave as compare to 1 and 5. Usually wave 3 must be more than 100% of wave 1. Wave 3 can be shorter than wave 1 only “Diagonal Triangles” in some cases.
- Wave 3 is normally steeper, sharper and faster 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 hits.
- Wave 3 normally extend anywhere between 100%-461% of wave 1 starting from the end of wave 2 can be of even 1000%. 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 for maximum profit. The trader who tries to chase wave 3 often get penalized.
Trading Volume increases and most of short term chart, technical indicator, RSI etc shows market in overbought state during the progress of wave 3 but it continuous the journey in same trend even in highly overbought/oversold state.
You must have observed that you sold a stock or index after a good sudden bounce with gaps in hope of some decline but that stock or index continuous its upward journey without any correction even in overbought state. Because that stocks is in wave 3 of Elliott wave’s cycle.
Again, just see the chart (3.1) above and try to observe the personality of wave 3 (from point 2-3, red digits, 371-407.35). You can see wave 3 is steeper and faster than all waves and extended exactly 261% of wave 1. Just identify thin blue horizontal lines touching bottom and top of wave 3 representing 0% and 261%.
In that chart, if you see closely, inner waves of wave 3 are also marked as (i), (ii), (iii), (iv) and (v). Again observe that inner wave (iii) of 3 and (iii) of 5 is also steepest and fastest of all. You can also observe, within wave 3, inner wave (ii) of 3 corrected just 38% of (i).
Personalities of Wave 4
Wave 4 carries the same personality and characteristics as wave 2. Smart investors who bought at low of wave 3, starts booking maximum profit. But those who missed or were not confident at lower levels starts buying at wave 4 because they are now convinced that price will move higher after seeing a good move of wave 3.
So wave 4 also a three wave move (abc) as profit booking at higher levels and buying at lower levels continues for some time.
Wave 4 generally corrects 23%-38% of wave 3 but can be less than 23% and deeper than 38% in some cases but wave 4 can’t overlap wave 1 within impulse.
In above given chart (3.1), you can see wave 4 corrected just more than 38% of wave 3 as wave 3 is extended. Though, here wave 4 is faster.
Personalities of Wave 5
Wave 5 is a last leg of main trend which is often confusing and ends diagonally sometimes. It is almost difficult to predict the top of 5th unless you are experienced because you don’t know what shape it is going take.
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.
Wave 5 or inner wave 5th of 5 often end as “Ending Diagonal” that is the indication that top is near. 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 5 is sometimes faster and bigger than wave 3. But wave 5 faster than wave 3 is always dangerous and fall after faster wave is very severe.
Actually common trader/investors have tendency to track the stock in news. The stocks come in news only after an action. Stock comes in news after a sudden and fast move of wave 3 and everybody start discussing of that stock. And common traders get confidence during the process of wave 5.
Wave 5 have tendency to show all technical indicators bullish. Stock is always famous during wave 5 and often comes in news and in everybody’s discussion. It is the nature of wave 5 to attract common traders and who invested during wave 5 often get penalized. Stock doesn’t show the price of wave 5 even after years some time. Hope you all remember Nifty after 2008 and some big stocks of that time like Reliance, Banking etc.
You must have observed that you bought stock or index after many positive news and fundamentals but it fell suddenly and you didn’t get your price for long time.
Just see the chart (3.1), I calculated total move from start of wave 1 to end of wave 3, thus from point 0 to point 3, i.e. 369.05 – 407.35 which is almost 38 points and end of wave 4 is 390.11. And wave 5 extended till 423.80 which is 34 points from start of wave 4. Thus, wave 5 extended almost 90% of total move from 0-3 and is extended. And also see the sharp correction till start of wave 5 after its completion.
I also marked inner waves of wave 5 as (i), (ii), (iii), (iv) and (v), just observe the inner wave (v) of 5 I marked by red lines indicating expanding triangle shape. That (v) and 5 is Ending Diagonal Triangle that will be explained later in separate chapter.
Personalities of Wave A
Wave A is an impulsive 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 if wave A is after a highly extended wave 5 then it may be sharper and faster correcting sharply till inner wave 1st of 5.
There is no calculation for wave A but it corrects till inner wave 1st of 5 in most cases. We must wait for A to complete.
In chart (3.1), Wave A (from points 5 to point A) is faster because of extended 5th wave and it corrected till the vicinity of inner wave (i) of 5.
Personalities of Wave B
Wave B also carries same characteristics as wave 2. It is a period of consolidation when there 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 correction may be and how much next up move may be.
Wave B is a corrective wave for wave A and can correct wave A by anywhere from 38% to 138%, generally it corrects around 61% of wave A. Yes, B can go above the start of wave A (is explained separately in “Type of Corrections”).
In Chart (3.1), Wave B (from point A to B) corrected exactly 61% of A and is a set of three waves (abc).
Personalities of Wave C
Wave C is plays very important role in EWT (Elliott’s Wave Theory) analysis as there is always a start of new impulsive after completion of C. So, if you are able to identify wave C, you can catch next impulsive for Big-Big profit.
- Wave C is always an impulsive in every type of correction and last leg of correction. Wave C is normally faster than A and B as it is the time when majority traders/ investors convinced that last rally has ended. So they start booking profit immediately as soon as wave B completes.
- Wave C is sharper and faster because majority of traders starts booking profit on bounce of wave B and stop losses of buyer’s hits. 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 be slower in some cases if wave A was sharper and faster.
- Wave C usually extends 100-123% of A. But C can also extend till 261% of A in some cases and sometimes it is as lower as 61% of A in extremely bull market (will be explained separately in “Type of Correction Chapter”).
Wave C is often sharp and fast and it has tendency to scare buyers. Common trader are often scared during the end of wave C and hesitates to enter in trade but price reverse suddenly. You must have heard phrase “Panic Buying” in stock market, it is the buying at the end of sharp wave C. But wave C may be slower and smaller if wave A was sharper.
In chart (3.1), wave C extended almost 138% of A as wave B was also normal of 61%. Also see that wave C is sharper and steeper than wave A which resembles the personalities of wave 3.
Wave’s cycle helps you to identify how much down side or upside left in market and wave’s personalities shows the nature and speed of next move.
Whenever there is any event or news, traders always take positions in advance and that advance position reflects on chart in the form of Elliott Wave pattern. Behavior of that pattern shows what is going inside and alerts you of future movement. You just need to identify pattern by seeing waves and observing its personality. Personalities of waves keep you ahead of news and events.
Again, this is not everything about Elliott Wave’s Theory. Wave’s Cycle and Personality of waves are just 02 starting chapters of my book. There are Fibonacci Calculations and different wave pattern for every impulsive and corrective wave which are inter-related to each other. Combination of this entire wave’s cycle, personalities of waves, Calculation of waves and most important Wave Pattern helps you to see the future of stock market and to transform your trading into profitable business.
Is Elliott Wave’s Theory Difficult to Learn?
Elliott Wave’s Analysis is just simple to learn if you have a perfect guide. But it is not as simple as calculating Support and Resistance by just typing Open, Low and Close price in Calculator. It takes time but is a perfect tool to estimate market moves.
Remember, Great things are not easy to achieve.
There are some charts to see the personalities of waves. Wave’s personalities are same for smaller/inner waves as well as bigger waves. All bigger waves are marked as (1,2,3,4 and 5) whereas inner waves are marked as (I, ii, iii, iv and v). Just see the charts carefully and try to identify the personalities.
Don’t be scared after seeing these charts as you may find it difficult to understand wave counts. These charts may be confusing for you as you don’t have complete knowledge of Elliott’s Wave Theory. But these are just simple for those who know it.