Elliott Wave in Practice: How to Use Waves in Technical Analysis

Why you need to know the basics of the Elliott Wave Principle?

The Elliott Wave Theory (Elliott Wave Theory – EWT) is one of the most complex yet controversial principles of technical analysis widely used by traders to predict market trends and cyclicality. Although the theory dates back to the 1930s with the work of Ralph Nelson Elliott, it gained true recognition only after the 1970s when Robert R. Prechter and A. J. Frost revived and further developed the principles.

It is worth understanding the theory because many large traders and investors base their strategies on it – however, it is important to know: the Elliott wave is not a magic weapon, but a behavior-based theory that tries to describe the natural cyclicality of mass psychology.

What is the Elliott Wave in reality?

The basic premise of Elliott wave theory can be summarized in elegant simplicity: financial markets do not move randomly, but follow a repeating, predictable pattern. Elliott claimed that these patterns are formed by human behavior and mass psychology – and that these patterns are fractal in nature, meaning the same pattern appears over both longer and shorter time frames.

The basic Elliott wave cycle consists of eight waves:

• Five Motive Waves (Motive Waves) – these move in the direction of the main trend.
• Three corrective waves (Corrective Waves) – these move in the opposite direction of the trend.

In a bull market, the numbering and lettering 1–2–3–4–5–A–B–C indicates this structure. In a bear market, the same pattern appears but with reversed logic.

The Basic Rules of Elliott Waves

Moving Waves: The Incompletion of the Five Waves

The driving waves defined by Elliott always move in the same direction as the broader trend. However, a driving wave is not standalone – they consist of a total of five smaller waves. Elliott provided three basic rules:

• Wave 2 cannot correct more than 100% of the movement of wave 1.
• A 4th wave cannot correct more than 100% of the movement of the 3rd wave.
• The 3rd wave among the 1st, 3rd, and 5th waves can never be the shortest – and typically it is the longest as well.

Additionally, the endpoint of wave 3 is always positioned higher than the end of wave 1. This is one of the easiest rules to verify.

Correction Waves: The Logic of Counter Waves

Corrective waves typically consist of three waves – usually denoted as A–B–C. These waves are generally smaller as they move against the broader trend. One of the most important rules: corrective waves never consist of five waves. This is one of the most common sources of error in practice, as traders using EWT can easily confuse corrective and motive waves.

Does the Elliott Wave Really Work? The Practical Challenges

The criticisms are valid: critics of the Elliott wave theory argue that the theory is highly subjective, and there are several ways to draw the waves without violating the rules.

Practical problems:

• A given market movement can be interpreted in several ways;
• The ex post facto ( analysis is much easier than real-time forecasting.
• The application requires practice and expertise

However - and interestingly - there are thousands of successful investors and traders who profit by using Elliott's principles. Despite the complexity, the method has not become useless.

The Elliott Wave and Fibonacci: The Practical Combination Solution

More and more traders are finding that the Elliott Wave is too subjective on its own. Therefore, a common solution is the combination of Elliott wave + Fibonacci retracement and Fibonacci expansion.

The Fibonacci ratios )38.2%, 50%, 61.8%, 78.6%( indicate specific support levels where the corrective wave is likely to retrace. This combinatorial approach is more objective, reducing the impact of subjectivity.

Closing thoughts: The Elliott wave as a tool, not a magic bullet

The Elliott Wave Theory is not a simple indicator or fixed trading technique – it is a theory of market behavior. Elliott found that markets follow 5-3 wave structure patterns and interpreted this as the natural cycles of mass psychology and human behavior.

In practice:

• A learning curve is necessary for proper application.
• It's best to combine it with other technical indicators or Fibonacci analysis.
• Its subjective nature can be risky for beginners.
• But those traders who take the time to study the master often develop their own intuitive understanding.

The Elliott wave does not guarantee profit, but when you correctly understand the logic behind it – especially applied in the context of waves in Hungarian – it provides a powerful mental framework for understanding market movements.