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charts

Neo Wave theory. Part 1. Rules of creating charts

Author Reviewed by
Michael Hypov Jana Kane Published
(https://www.litefinance.org/blog/authors/mikhail-
(https://www.litefinance.org/blog/authors/jana-
11.09.2020
hypov/) kane/)

NeoWave theory by Glenn Neely. Basic concepts. Major principles and rules of building Neo
Waves
Dear friends!
There are many tools to analyze the markets, from stock markets to forex, based on the Elliott wave theory. These systems of the analysis of the
market prices find a response from a variety of participants in exchange trading. We have already studied the classical readings of the Elliott
wave theory offered by Robert Prechter and Bill Williams, and I can’t bu mention a more modern and revolutionary NeoWave approach
developed by a financial analyst Glenn Neely.
This a completely new approach to the wave analysis that, according to the author and his followers, has stronger predictive powers compared to
earlier studies. We shall find out if it is really so in the process of studying the NeoWave theory. We shall start with the answers to the major
questions of the Wave theory that were never published before Glenn Neely’s Mastering Elliott Waves was written.

What are waves, monowaves and complex waves?

Remarkably, but in books by Elliott and his followers, there is now a clear definition of a wave, which the whole theory is based on. Neely defines
a wave as a straight line of any length moving in any direction, except vertical. Waves result from the imbalances in the number of buy and sell
orders шт the market. Neely also introduced a completely new term of Monowave, which is a kind of building block of all wave patterns. A
monowave is the simplest type of wave that is the price movement starting from a change in the price direction until the next change in the price
direction occurs.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_1.jpg?
q=75&s=c760d81ece109d1cced18d32718310b3)
The monowave is marked by the blue line in the chart, the yellow line marks the movement in the opposite direction. A monowave can be a
section of the price chart of any length where the price is moving in the same direction, before this section and after it, there occurs a change in
the price action.

An idealized monowave is a straight line, but it rarely occurs in practice.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_2.jpg?
q=75&s=07f26a0a32a1061f579f7974ec85dc58)
In the above chart, blue lines mark the price movement with multiple insignificant changes in the price direction. This movement can be called a
monowave until the change in the general direction occurs, it happens when an up movement reverses down (marked with an orange line).
Neely calls a combination of three or five monowaves a polywave, the wave that includes three or five polywaves is referred to as a multiwave,
and the combination of three or five multiwaves is a macro-wave. The patterns of a higher degree are also called macro-waves, thus the author
abandons the classical hierarchy described in the article, devoted to the wave degrees (https://www.litefinance.org/blog/for-
professionals/market-wave-theory-by-robert-prechter-part-2-wave-degrees-and-more-guidelines-of-wave-alternation/).

Rules of chart construction

One of the major differences of Glenn Neely’s Mastering Elliot Wave from the approaches described by Prechter and Williams is the principle of
chart construction. The analyst developed a completely new system of technical analysis and data management that we are now going to study.
At the first stage, we divide the chart into a few equal time periods.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_3.jpg?
q=75&s=002facee826011d10650a96cdb086e2f)
In our example, the time units will be daily sessions marked by blue dotted lines in the chart.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_4.jpg?
q=75&s=98ab92d3d023323bca5752ed9c304abf)
Next, we divide the defined period into two parts. Now, we need to define the low and the high of each period (not the half, but of the entire
day). You can use the high and low for the entire day and plot them in the order they occurred.
If the low of the day comes first, you put a dot in the middle of the first half (the left part), in the middle of the other half (the right one), you put
the dot corresponding to the high. If the situation is the opposite and the high of the day comes first, you plot it first, and the low is plotted
second.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_5.jpg?
q=75&s=ab8e9a498dcb4d8ed54420ba3bd81353)
The above chart displays an example of such an analysis. In the first left time period, there comes the low first, so, we plot the low in the left time
slot (the very first bald blue dot in the chart), and we plot the high in the right time slot (a blue dot a little more to the right). The same situation is
on the second day. On the third day, the high is reserved first in the left time slot, and the low is plotted in the right slot.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_6.jpg?
q=75&s=68467b45845a4d8af90c70ece67f83cd)
Now, we connect the dots with a line and see a pattern consisting of monowaves.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_7.jpg?
q=75&s=01e4651c93904f8b2827211eeac91dde)
Note that some of the monowaves can be combined into a single wave. Namely, they are two waves in the green area, and two waves -in the
yellow area.
As for the practical application of Neely’s method, we don’t have to draw the layout manually. If you switch the daily session layout in the settings
of the TradingView chart, you will see an automatic layout of the daily sessions where you can right away plot the starting and the final points of
monowaves.
There's even a simpler way to construct the chart using the NeoWave V0 indicator, which can be easily found in the Trading View library.

Identification of zero (starting) point and scaling

The efficiency of the NeoWawe analysis much depends on the right choice of the starting point for your observations. At the first stage, we pick
up the market and plot a chart of monthly highs and lows in the way I described above.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_8.jpg?
q=75&s=e2b6998d3f6669dab62d716de8a8ed16)
Highs and lows are connected by blue lines on the chart. Now, we should define the monowave that is the closest to the center of the time

period.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_9.jpg?
q=75&s=a392da35130cbe8996de632f7fbc4697)
First, we plot the high and low for the period we study. The high is at 17215 USD it is marked by the green circle. The low is 3204 USD. I marked it
with a red circle.
We shall find the arithmetic mean of two values.
(17215 + 3204)/2 = 10209
I marked this level by the horizontal pink line in the chart. Now, the monowave is clear, its starting and final points are the closest to the center of
the entire price range we have just identified.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_10.jpg?
q=75&s=e799143bc8cb4f99cfff6210670a7a2d)
This monowave crosses the pink line above a zero level. I marked it with a pink circle in the chart.
This will be the starting point for the chart of a lower degree. If we first used a four-day timeframe, we shall now switch to the four-hour chart.
Neely notes that the second chart must include about 60 bars.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_11.jpg?
q=75&s=941f5e7a539591e4e83dd1cdf00c803b)
The above chart displays the 60-bar sequence that starts with the zero point identified earlier. For you to see it clearer, I put a pink circle around
this point. Now, we need to identify the important high and low. In the sequence under study, there is an important low, it is marked by the red
circle in the chart.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_12.jpg?
q=75&s=977dd12cc218361be89460c923a52cf0)
Now, we switch to the two-hour timeframe and draw a chart that is twice more detailed than the current chart. The important low will be the
starting point of the final chart for analysis, it is marked with the red circle. Besides, we must observe the rule of proportion that I’ll explain
below.
If you want, you may employ other timeframes, which suit more to your current tasks. The most important is to observe the rule of proportion,
which I will cover below.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_13.jpg?
q=75&s=a01d11f63cf5c21c9f2ef0b8ca917aa6)

At the final stage, we check if we can combine the monowaves if they move in the same direction. The above chart presents two such cases
(marked with green areas) when two monowaves can be united into a single formation.

Rule of proportion
The efficiency of the visual analysis of the market situation much depends on the chart's appearance. In his book, Glenn Neely introduces the
concept of ideal, based on the Elliot Wave Principle, chart according to the market action.
There are two types of the action: Directional, composed of a series of monowaves, which as a whole create an increase or decrease in a market’s
value; Non-Directional action, which we often call a sideways trend or a flat, create stagnation of a market’s value.

Directional actions continue until the lengths of the down monowaves are visibly shorter than the lengths of the up waves (it is the opposite for a
bear trend). Besides, the second monowave of a Directional period is no longer than 61.8% of the first wave.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_14.jpg?
q=75&s=0042797c13a0e5c2a2b8ddf696cd12dc)
The above chart displays a part of the analyzed pattern, which is a vivid example of the Directional action. The green circle marks the low of the
correction. As you see, it is at 0.618. The next correction, whose low is marked by the red circle, runs further than level 0.618, which signals the
Directional action should finish soon.
In a Non-Directional period, the second wave always retraces the first monowave more than 61.8%. Furthermore, all phases of a Non-Directional
action must be retraced by at least 61.8% (with the occasional exception of one phase and a retracement in a series of monowaves). When the
price goes beyond the range of the entire Non-Directional period, it usually means the termination of the Non-Directional action.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_15.jpg?
q=75&s=fb2550466fa391af350df324962ab138)
The above chart displays a Non-Directional action. I deliberately marked the first retracement by pink lines to show that it can be seen as single
monowave according to the Rule of Neutrality that I will cover a little later. As a result, the first retracement is roughly equal to the preceding up
movement. Next retracements are also considerably longer than the proportion of 0.618.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_16.jpg?
q=75&s=8e1a7ccff2e9679d6c836920a473c962)
This chart displays the signal of the termination of the Non-Directional action. The next price action finishes below level 1.618 (marked with the
red circle) of the entire non-directional period (the extreme price levels are marked with black horizontal lines).
The efficient use of Neely’s method requires sticking to a correct price-to-time ratio, which will produce an angle of ascent or descent according
to the type of market action unfolding. If it is a Directional action, it should travel from the bottom left to the top right or top left to the bottom
right corner of a perfect square. In other words, the price should be advancing at an angle of about 45 degrees. There can be minor deviations
(no more than 25% of the length of one side of the square).
When the action is non-directional, Neely recommends constructing the chart in the way that the up and down periods cover approximately half
of a perfect square.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_17.jpg?
q=75&s=91431ec5318f6dd19507abe050cdb3d5)
The BTCUSD (https://www.litefinance.org/trading/trading-instruments/crypto/btcusd/) chart above displays proper proportions of directional and
non-directional actions. Directional monowaves are located in green perfect squares. Except for insignificant deviations, the rule of proportion is
fulfilled (it travels from the top left to bottom right).

The non-directional action is in the red square. Note that all monowaves are in the upper half of the square.

Complex monowaves
As you can see from the previous examples, I represented the monowaves, which could be combined into a single wave, with one wave. But it is
not always convenient to do, as some information about the price movement is lost.
Glenn Neely offered an alternative way to label monowaves. He suggests putting dots at the end of the monowave being studied and,
accordingly, at the beginning of the next one. At the points where the monowaves are linked together as an element of complex formation, such
dots will be absent, indicating that this sequence has been combined into one monowave.

Rule of Neutrality
Most of the monowaves travel at a diagonal to the price/time axis. Occasionally, there can be monowaves progressing more horizontally than
vertically. To identify such a wave, you should frame into a perfect square and draw a diagonal line from the origin point at an angle of 45
degrees. The rule of neutrality is considered if the price action travels below this diagonal line (in an up movement) or above it (in a down
movement), otherwise, the rule of neutrality is not considered. Therefore, if the monowaves forms at an angle that is less than 45 degrees, the
wave can be considered horizontal.
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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_18.jpg?
q=75&s=a0e72c0bd5940f597318f7d9774335ae)
Let us see the sequence of three monowaves that I mentioned earlier (marked with pink lines). The central monowave looks like a horizontal
action. To verify whether it a true horizontal action, I drew a perfect green square and drew a diagonal line from the origin of the monowave
being studied. As you see the angle of the price action is less than 45 degrees, and so the rule of neutrality should be considered. In practice, you
won’t have to always draw those complex charts to identify the type of each monowave, as, most commonly, you can visually assess it.

Horizontal price action can separate two waves moving in the same or opposite directions
When a horizontal action separates the monowaves moving in the opposite direction, we refer to the Aspect-1 of the rule of neutrality. The
Aspect-1 states that the first monowave terminates at the final point of the horizontal period that is above the local low or below the local high.
That is we kind of move the idealized top of the first monowave to the termination point of the second wave that represents a horizontal action.
Besides, it must be remembered that the horizontal action shouldn’t be greater than 38.2% of the previous monowave (the first one on the left).
Besides, the retracement following the horizontal action (the third monowave in the pattern) should be at least 61.8% of the first monowave.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_19.jpg?
q=75&s=09d6c592eb1b634186754a8263c36c40)

The expected horizontal action is within the pink square in the above chart. As it runs above the pink diagonal of the perfect square, its angle is
less than 45 degrees and it a truly horizontal action. The next condition, saying that retracement following the horizontal activity should be at
least 61.8% of the first monowave, is also fulfilled in this example. There is also met the condition that reads that the horizontal action should be
less than the prior monowave. Accordingly, we can state that the Aspect-1 of the neutrality rule is observed here.

The Aspect-2 of the Rule of Neutrality, according to Neely, says that when horizontal (or near horizontal) price action is separating two waves
moving in the same direction, the horizontal action can be ignored, leaving just larger monowave to deal with. If it will be more convenient to
analyze the pattern is the formation is divided into three smaller monowaves, this interpretation is also acceptable.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_20.jpg?
q=75&s=69579fa6ca8065597c4a7ea273c89b8a)
Going back to the previous example, we can analyze the structure, marked with the pink lines, as the single large monowave, which is evident
from the red dots in the chart, or as a combination of the three smaller waves.
However, the Aspect-2 of the neutrality rule shouldn’t be applied, as the horizontal action is directed in the opposite direction to the preceding
and the following waves.

The Rule of Relative Position of Waves (Identification Rule)

Like Prechter and Williams, Neely offers to label monowave with numbers, starting with 1 according to their chronology; he also divides the price
movements into Impulsive and Corrective. You can read more about impulse and corrective waves in my previous articles.
If the wave doesn’t have distinctive features, its structure is defined based on the preceding and the proceeding structures. In the course of
analysis, the current wave is labeled m1, the preceding one is m0, and the next one is m2.
The position rule states that the preceding and proceeding waves have a structure similar to the current wave. Let's see the examples.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_21.jpg?
q=75&s=4330dc542d145cdef06d6de70bea05c6)
The wave m1, which we now analyze, is marked by the green wave in the chart. Blue lines mark the prior and the following waves. The pink
horizontal lines mark the high and the low of the monowave m1. After the price breaks through the m1high (the green circle in the chart), the m2
finished at the lowest point, which has been confirmed. The opposite situation is also correct when the m2 termination point is confirmed when
the price breaks through the low of m1.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_22.jpg?
q=75&s=7262dae409660795ff9fdfdf34f4a704)

If m2 breaks through the low of m1, and it is not a compacted wave group (the concept will be covered in detail in me next articles), the first price
action reversal after the break of m1’s low (the green circle) is the endpoint of the wave m2. The opposite thesis is also correct when the m2 wave
breaks the m1’s high. Besides, these rules can be used in the same wave to analyze wave m0 and the earlier waves.

If, before the price breaks through one of the M1’s extreme level, there have formed more than one monowave, then, the m0 and m2 can be
considered a group of monowaves, they will be labeled, in this case, mg0 and mg2. Most commonly, the mentioned wave groups consist of more
than five simple monowaves, and the number of constituent waves in different groups is the same. If just one wave has formed before the price
breaks out the high or the low of m1, the waves m0and m2 can be interpreted only as simple monowaves.

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_23.jpg?
q=75&s=a38badf0a0c5ad664e6edd2832c26fff)

The above chart displays an example when there is one monowave completes before the price breaks out the low of m1. The meeting points in
both cases are marked with green circles.

As a result, the rules of the wave position can be brought to a single thesis: to confirm the completion of the wave on the right of m1 (future
waves), the price should break through the high or the low of the previous wave; to identify the endpoints of the waves on the left, we need to
identify in the past the moment when the price crossed the extreme level of the following monowave.

This rule applies not only to the monowaves m0 and m2 but also to the wave groups mg0 and mg2, it is also relevant for the preceding and
proceeding waves. In the analysis, you need to refer to the closest highs and lows.

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(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_24.jpg?
q=75&s=cb3b3761a5e41af02d58e37e0b088084)

Let us study the example in the above chart. The green diagonal line marks the monowave m1, green horizontal lines mark its high and low. After
the following monowave m2 breaks the high first upside (green circle), next, downside, it signals the termination of wave m2.

The next wave m3 breaks through the low and also hits a fresh low marked with the pink horizontal line. When m4 is close to the previous low,
m3 is completed. When analyzing the next monowave, m5, we will look for a lower low (pink line). When the low is updated (pink circle), m4 is
confirmed to have completed.

Here, I am finishing the first article devoted to the NeoWave theory. In the next articles (https://www.litefinance.org/blog/for-professionals/neo-
wave-theory-part-2-basic-information-on-polywaves-and-structure-labels/), I will cover more interesting concepts of the theory, namely, the
Retracement rules, and the relationships between the lengths of waves.

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Price chart of BTCUSD in real time mode

Periods M1 M5 M15 M30 H1 H4 D1 W1

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110k

100k

90k

80k

70k

60k

50k

40k
Aug '24 Sep '24 Oct '24 Nov '24 Dec '24 Jan '25

Jul '23 Jan '24 Jul '24 J…

(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.09/BTCUSD_hyipov_logo.jpg?q=75&w=1000&s=410f2f0cdfe25443f7aa73fd3114e771)

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material
published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for
the purposes of Directive 2004/39/EC.

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WRITTEN BY Michael Hypov (https://www.litefinance.org/blog/authors/mikhail-hypov/)

Tech analyst and crypto trader

What should I read next?

18 Sep. 2020 16:04

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17 Sep. 2020 11:41

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16 Sep. 2020 17:38

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proportions
(https://www.litefinance.org/blog/for-professionals/neowave-part-5-retracement-rule-3/)

11 Sep. 2020 11:01

Neo Wave theory. Part 2. Basic information on Polywaves and Structure labels
A further description of the most progressive interpretation of the Elliott wave theory - NeoWave by Glenn Neely. General structure
and basic labels of Neo Waves
(https://www.litefinance.org/blog/for-professionals/neo-wave-theory-part-2-basic-information-on-polywaves-and-structure-labels/)

11 Sep. 2020 10:48

NeoWave. Part 7. Retracement rule 4. Conditions “c”, “d” and “e”

An overview of NeoWave theory by Glenn Neely. This article continues covering the conditions to apply retracement rule 4.
(https://www.litefinance.org/blog/for-professionals/neowave-part-7-retracement-rule-4-conditions-c-d-and-e/)

09 Sep. 2020 15:24

Part 1. A new trading strategy based on the systems by Williams and Prechter
I combined the interpretation of the Elliot Wave Principle suggested by Bill Williams and Robert Prechter and tried to develop the best
Elliott wave trading strategy
(https://www.litefinance.org/blog/for-professionals/part-1-a-new-trading-strategy-based-on-the-systems-by-williams-and-prechter/)

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