Elliott Wave Theory Rules
In simple terms, traders can view wave theory as changes in three types of blocks:
1. Shape: The alternation between impulse waves and corrective waves
2. Proportion: The proportional changes between impulse waves and corrective waves
3. Time: Analysis of the duration between two waves and changes in balance
The wave rules during bullish and bearish markets generally follow the basic rules of Elliott Wave Theory, but the market changes rapidly. Below are the three iron rules for bullish and bearish trends to share with traders. When you notice that price movements contradict these iron rules, please be vigilant about the applicability of wave theory.
Bullish Three Iron Rules:
◑ The low of wave 2 cannot fully retrace and break below the low of wave 1 (false breakout)
◑ Wave 3 is usually the longest wave in the impulse sequence
◑ The low of wave 4 cannot overlap with the peak of wave 1 (does not break the neckline)
Bearish Three Iron Rules:
◑ The recovery of wave b must be less than the peak of wave a (false breakdown)
◑ Wave c is usually large in amplitude, takes a long time, and has a high overall trading volume
◑ When wave c rebounds, the highest point cannot overlap with the lowest point of wave a