Catch Me If You Can: Breaking Down the Elusive Elliott Wave
Here's an explanation why Elliott Waves don't work most of the time, and then sometimes work perfectly.
Lets take a closer look at a single impulse wave up and its correction (I'm using 61.8% retracement and wave 3 = 100% of wave 1). You simply can't trade based on that (red dots), here's why.
If you treat it as 123 up trend forming (green count), you can't confidently:
1. short at the end of 1 to catch wave 2 because it can go higher (have an extension from 100% to 127.2%, 161.8% and 261.8%)
2. long at the end of 2 to catch wave 3 because it can go lower
- from 23.6% to 38.2%, 50% and finally 61.8% and then go up for the up trend 123
- up to 88.6% of wave W in wave X and then go up in Y (if this is X not 2)
- and even lower after that, break the start of wave 1 to reverse the trend down
3. short at the end of wave B (red) after a bounce from wave 2 to catch wave C (red), because it can go higher
- it can go up from 23.6% to 38.2%, 50% and finally 61.8% of prev swing wave A (red) and then bounce down as zigzag or triangle
- it can retrace as wave B (red) in a flat up to 88.6% and then go down still
- or it can even be an expanded flat wave B/X and retrace up to 138.2% of wave A (38.2% above the end of wave 1, Sometimes even 61.8%! and only then drop down)
- or it will go up in wave 3/Y = 100% of wave 1/W
4. long on breakout of the end of wave 1 to catch wave 3 because it can pullback
- it can be wave a of Y or lower degree iii or 3 and immediately pullback in b/iv below wave 1
- it can be an expanded flat wave B/X and retrace from 105% up to 138.2% of wave A (38.2% above the end of wave 1, Sometimes even 61.8%! and then drop down)
- it can be a short Y = 61.8% of W in WXY and then go down
That's why you are only supposed to buy on a retest of wave 1 after the breakout
5. long at the end of wave C (next bounce from the end of B) (red) because it can go lower
- it can become a triangle ABCDE and break the other way
- it can still be wave B and go higher up a bit then down in zigzag/flat (same impulse-correction fractal of a lower degree, same options, see #3)
- it can break the end of wave 2 and continue down as wave C from 61.8% up to 1.618% of wave A, although we mostly have short C = 61.8% of A in Bitcoin
So, on the long side you are left only with 2 not-so-tradable options:
- buy above 138% of wave 1 to ride a very small ~10% (100% - wave B retracement - 38%) chunk of wave 3 = 100% of wave 1.
However, the expanded flat can still go to 161.8% and wave 3 can end early at 61.8% as wave C/Y.
And if not that, this trade probably has a bad R/R and you will pay in fees a lot more that you possibly can gain.
- buy on retest of wave 1/A/W in iv/x after the breakout to ride wave 3/C/Y (100% - wave 2/B/X retracement) up to 38.2% in case of an expanded flat or up to 100% of wave 1 in case of wave 3/C.
And you can only to the 2nd option on the short side, because usually C = 61.8% of A, not 100%, invalidating the first setup.
But guess what, that's called trading breakouts from a range/triangle, and you don't need Elliott Waves for that.
Conclusion:
I just showed you that in most cases Elliott Waves don't really work, they give you a number of possibilities for both bull/bear cases, not trend direction.
You can't trade based only on Elliott Waves and fibs, without using other TA methods.
The trend is basically just a sequence of 2 impulses and then comes a wave 4 which can become the 1st impulse down and reverse the trend or go up in wave 5. Waves 3 and 5 are not guaranteed. The only thing guaranteed is a 2nd impulse following the 1st. But in the current market with unclear 3/5 wave structure, low liquidity, hidden bottoms and traps you can't clearly spot even the 1st impulse, so there might not be a 2nd one.
Continued Below =>
Lets take a closer look at a single impulse wave up and its correction (I'm using 61.8% retracement and wave 3 = 100% of wave 1). You simply can't trade based on that (red dots), here's why.
If you treat it as 123 up trend forming (green count), you can't confidently:
1. short at the end of 1 to catch wave 2 because it can go higher (have an extension from 100% to 127.2%, 161.8% and 261.8%)
2. long at the end of 2 to catch wave 3 because it can go lower
- from 23.6% to 38.2%, 50% and finally 61.8% and then go up for the up trend 123
- up to 88.6% of wave W in wave X and then go up in Y (if this is X not 2)
- and even lower after that, break the start of wave 1 to reverse the trend down
3. short at the end of wave B (red) after a bounce from wave 2 to catch wave C (red), because it can go higher
- it can go up from 23.6% to 38.2%, 50% and finally 61.8% of prev swing wave A (red) and then bounce down as zigzag or triangle
- it can retrace as wave B (red) in a flat up to 88.6% and then go down still
- or it can even be an expanded flat wave B/X and retrace up to 138.2% of wave A (38.2% above the end of wave 1, Sometimes even 61.8%! and only then drop down)
- or it will go up in wave 3/Y = 100% of wave 1/W
4. long on breakout of the end of wave 1 to catch wave 3 because it can pullback
- it can be wave a of Y or lower degree iii or 3 and immediately pullback in b/iv below wave 1
- it can be an expanded flat wave B/X and retrace from 105% up to 138.2% of wave A (38.2% above the end of wave 1, Sometimes even 61.8%! and then drop down)
- it can be a short Y = 61.8% of W in WXY and then go down
That's why you are only supposed to buy on a retest of wave 1 after the breakout
5. long at the end of wave C (next bounce from the end of B) (red) because it can go lower
- it can become a triangle ABCDE and break the other way
- it can still be wave B and go higher up a bit then down in zigzag/flat (same impulse-correction fractal of a lower degree, same options, see #3)
- it can break the end of wave 2 and continue down as wave C from 61.8% up to 1.618% of wave A, although we mostly have short C = 61.8% of A in Bitcoin
So, on the long side you are left only with 2 not-so-tradable options:
- buy above 138% of wave 1 to ride a very small ~10% (100% - wave B retracement - 38%) chunk of wave 3 = 100% of wave 1.
However, the expanded flat can still go to 161.8% and wave 3 can end early at 61.8% as wave C/Y.
And if not that, this trade probably has a bad R/R and you will pay in fees a lot more that you possibly can gain.
- buy on retest of wave 1/A/W in iv/x after the breakout to ride wave 3/C/Y (100% - wave 2/B/X retracement) up to 38.2% in case of an expanded flat or up to 100% of wave 1 in case of wave 3/C.
And you can only to the 2nd option on the short side, because usually C = 61.8% of A, not 100%, invalidating the first setup.
But guess what, that's called trading breakouts from a range/triangle, and you don't need Elliott Waves for that.
Conclusion:
I just showed you that in most cases Elliott Waves don't really work, they give you a number of possibilities for both bull/bear cases, not trend direction.
You can't trade based only on Elliott Waves and fibs, without using other TA methods.
The trend is basically just a sequence of 2 impulses and then comes a wave 4 which can become the 1st impulse down and reverse the trend or go up in wave 5. Waves 3 and 5 are not guaranteed. The only thing guaranteed is a 2nd impulse following the 1st. But in the current market with unclear 3/5 wave structure, low liquidity, hidden bottoms and traps you can't clearly spot even the 1st impulse, so there might not be a 2nd one.
Continued Below =>
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4. Market structure and Geometry: S/R zones, Supply/Trend lines, Channels, Patterns, Cycles and Trends starting from larger TFs to smaller TFs, from left to right to establish your current position in a cycle or compared to other cycles. You also try to determine market Bias based on geometry/fibs/cycles.
Market Structure/Geometry: S/R, Pivots, Supply/Demand, Fibs, GANN, Common Trading/Gartley patterns
Trend direction/momentum: MAs, MACD, EWO with bands, Pitchforks, Ichimoku, Trend Indicators OBV, CCI, ADX DI, Heikin Ashi
Reversal divergence/overbought/oversold: MACD, EWO, RSI, ADX DI
Volatility: HV, IV, ATR, Bollinger
Market cycles/systems: Elliott Waves, Wyckoff, Ichimoku, TD Sequential, Bill Williams, HVF, Equilibrium
use Price/Volume Action and Candlesticks to confirm Trading Patterns.
5. Use trigger indicators for entry/exit using Risk Management with a stop-loss. Risk Management is king.
general entry: S/R, Pivots, MAs, RSI, MACD, EWO, Fibs, Common Trading/Gartley Patters, Volume Profile, Order Book
You can also trade breakouts, volatility, swing trade and scalp
As a general rule for indicators you should use:
- a volume indicator (Volume Profile, OBV, MFI etc)
- a bias indicator (based on volume/sentiment/geometry - tensorcharts, bfxls, fibs)
- a trend/momentum indicator (MA, MACD, EWO, CCI, OBV/PVT)
- an oscillator for divergence and overbought/oversold (RSI, MACD, EWO, Stoch etc)
You should use oscillators during sideways corrections in ranges and trend indicators during trends not vice versa.
Elliott Waves entry:
- long at the end of wave 2 to ride wave 3
- long at the end of wave 4 to ride wave 5
- short at the end of wave B to ride wave C
- confirm the beginning of new impulse with v waves of a smaller degree, wait for a pullback (wave ii) and enter.
- use EWO to find wave 4 (or B/2)
- use Price/Volume action to confirm the strength of trend and developing wave as an impulse/correction
Wyckoff entry:
- establish your place in a cycle, trade only markup/markdown, don't trade inside the accum/distrib range
- long at spring retest or at BUEC retracement < 50%
- use Price/Volume action to spot a Spring. 3 types of springs
6. monitor trend health starting from lower TFs to higher TFs and manage/hedge/exit position according to you Risk Management and position size.
Market Structure/Geometry: S/R, Pivots, Supply/Demand, Fibs, GANN, Common Trading/Gartley patterns
Trend direction/momentum: MAs, MACD, EWO with bands, Pitchforks, Ichimoku, Trend Indicators OBV, CCI, ADX DI, Heikin Ashi
Reversal divergence/overbought/oversold: MACD, EWO, RSI, ADX DI
Volatility: HV, IV, ATR, Bollinger
Market cycles/systems: Elliott Waves, Wyckoff, Ichimoku, TD Sequential, Bill Williams, HVF, Equilibrium
use Price/Volume Action and Candlesticks to confirm Trading Patterns.
5. Use trigger indicators for entry/exit using Risk Management with a stop-loss. Risk Management is king.
general entry: S/R, Pivots, MAs, RSI, MACD, EWO, Fibs, Common Trading/Gartley Patters, Volume Profile, Order Book
You can also trade breakouts, volatility, swing trade and scalp
As a general rule for indicators you should use:
- a volume indicator (Volume Profile, OBV, MFI etc)
- a bias indicator (based on volume/sentiment/geometry - tensorcharts, bfxls, fibs)
- a trend/momentum indicator (MA, MACD, EWO, CCI, OBV/PVT)
- an oscillator for divergence and overbought/oversold (RSI, MACD, EWO, Stoch etc)
You should use oscillators during sideways corrections in ranges and trend indicators during trends not vice versa.
Elliott Waves entry:
- long at the end of wave 2 to ride wave 3
- long at the end of wave 4 to ride wave 5
- short at the end of wave B to ride wave C
- confirm the beginning of new impulse with v waves of a smaller degree, wait for a pullback (wave ii) and enter.
- use EWO to find wave 4 (or B/2)
- use Price/Volume action to confirm the strength of trend and developing wave as an impulse/correction
Wyckoff entry:
- establish your place in a cycle, trade only markup/markdown, don't trade inside the accum/distrib range
- long at spring retest or at BUEC retracement < 50%
- use Price/Volume action to spot a Spring. 3 types of springs
6. monitor trend health starting from lower TFs to higher TFs and manage/hedge/exit position according to you Risk Management and position size.
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and a screenshot copy for future reference
- they are a mess in a bear market/correction with unclear wave structure (3 or 5 waves in an impulse?), hidden alt bottoms, huge wicks, bull/bear traps, fakeouts and broken reversal patterns, upwards corrections masked as trends, low liquidity and lots of stoploss hunting, lots of flats. These conditions are not suitable.
- they also don't work in a raging trend with shallow 23.6% retracements, expanded flats with overshooting and hyperextended waves where the usual wave/fib statistics doesn't work and you can't definitively project the end of both impulses and corrections.
- you can more or less reliably predict only wave 4 to ride wave 5. Studies show that the probability of successful detection of wave 4 is 2x higher than that of wave 2/B because you already have the completed 3-impulse wave structure. But by then you've already missed the wave 3 with the most profit. Wave 4 can either continue up as wave 5 or go down as a larger correction of a new impulse of a down trend.
So, if markets trend 25% of the time, correct/consolidate 70% of the time and rage like 5% of the time (for a couple of weeks in a year), that makes Elliott Waves useful only 25% of the time. So, how do you trade then?
You use:
1. Order Flow/Order Books (tensorcharts) to spot large buy/sell walls and trade accordingly. You should do what the big guys do.
Order Flow is the only reliable way to predict the future - you see real orders with real volume.
- Some of them are fake to scare you and make you sell and fill buy orders of the same person below at a lower price. Or make you buy to fill their shorts.
- Most of the time the price will be ranging between a sell wall and a buy wall, because the market makers don't buy/sell in a single market order to prevent the price from crashing, they create a price range and play pong/tetris with retail traders, doing both buy/sell. In an accumulation range the goal is to buy more than sell, in a distribution range - to sell more than buy.
- In many cases they put a buy/sell wall there just to draw the correction/impulse that's due.
2. Price/Volume Action, Volume Analysis, OBV/PVT. This is the 2nd best way to predict the future.
You look up volume on these exchanges:
BitMEX is a futures exchange with up to 100x margin - shows what the big guys do with the futures, has a raging pumped up volume, lots of spoofing
Bitfinex is a spot market with 3.3x margin - sort of avg. crypto exchange with margin, owner of USDT, moderate spoofing
Bitstamp is the most reliable exchange with crypto/fiat, no margin - shows fiat volume, general public interest in crypto
Kraken is the older exhange with crypto/fiat, no margin - shows fiat volume, mostly USDT/USD (fake)
Coinbase is a retail market exchange - shows what retail traders do
What usually happens is Bitfinex and BitMEX selling BTC to Bitstamp and Coinbase at a higher price.
basics of Price/Volume action:
- small volume spikes (above Volume MA) preceed price action in this direction
- price/volume divergence: in a proper up trend volume is increasing with the price, in a proper down trend/correction - decreasing inside each leg and across all legs overall
- trend strength: large candle size must be confirmed by large volume, small candle with large volume or large candle with small volume = reversal/correction
- candle wicks: large wick below - strong demand, up trend, large wick above - strong supply, down trend/correction
- there's no red/green volume, there's just volume. Color only means that there were a bit more buys than sells and can flip a close.
3. Sentiment Analysis
You look at longs vs shorts. In a proper up trend shorts must decline, longs - increase.
When there's too much shorts over longs or vice versa market can change direction and a squeeze can happen.
TradingView: BFXLS, BTCUSDLongs/BTCUSDShorts
Bitfinex: bfxdata, datamish
BitMEX: Coinfarm.online