Chapter 1: Foundations of Elliott Wave Theory — Answers

1. Who developed the Elliott Wave Principle and in what decade?

 Ralph Nelson Elliott, during the 1930s.

2. What is the basic idea behind the Elliott Wave Theory?

 Markets move in repeating wave patterns driven by investor psychology and

sentiment, alternating between impulsive (motive) and corrective phases.

3. How many waves are in a complete Elliott Wave cycle?

 A complete cycle has 8 waves: 5 impulse/motive waves and 3 corrective waves.

4. What distinguishes impulse waves from corrective waves?

 Impulse waves move in the direction of the main trend and have a 5-wave structure;
corrective waves move against the trend and generally form 3-wave patterns.

5. Define the concept of fractals in the context of Elliott Wave Theory.

 A fractal means each wave structure contains smaller versions of itself. For example, a
single impulse wave contains its own 5-wave substructure.

6. What is the significance of crowd psychology in wave formation?

 Elliott believed that market participants collectively react in predictable emotional

cycles, leading to consistent wave patterns over time.

7. Can Elliott Wave Theory be applied across all timeframes? Explain.

 Yes. Elliott Waves are fractal, meaning they appear in all timeframes, from minutes to
years.
Chapter 2: The Impulse Wave Structure (Motive Waves) —
Answers
1. What are the defining rules of a 5-wave impulse?

 Wave 2 cannot retrace beyond the start of Wave 1.

 Wave 3 cannot be the shortest of waves 1, 3, and 5.
 Wave 4 cannot enter the price territory of Wave 1.

2. Describe the difference between an impulse and a diagonal.

 Impulses are fast and strong with strict rules; diagonals (leading or ending) are wedge-
shaped and can have overlaps, especially between Wave 1 and 4.

3. What is the rule of alternation, and how does it apply to impulse waves?

 If Wave 2 is sharp, expect Wave 4 to be flat/sideways, and vice versa. It helps in

anticipating wave structure variation.

4. Which wave in the impulse cycle is typically the longest?

 Wave 3 is usually the longest and most powerful.

5. Can Wave 4 enter the price territory of Wave 1? Justify your answer.

 No. In a typical impulse, Wave 4 must not overlap Wave 1—except in diagonals,
where it is allowed.

6. Describe a leading diagonal. In which wave positions can it appear?

 A leading diagonal has a 5-3-5-3-5 structure and forms in Wave 1 of an impulse or

Wave A of a zigzag correction.

7. What technical tools can help confirm an impulse wave count?

 Fibonacci extensions, momentum indicators (e.g., RSI, MACD), volume, and

trendline/channel tools.
Chapter 3: Corrective Wave Structures — Answers
1. What are the main types of corrective waves?

 Zigzags (5-3-5), flats (3-3-5), triangles (3-3-3-3-3), and combinations (WXY or

WXYXZ).

2. Describe the structure of a zigzag correction.

 A 5-3-5 pattern where Wave A is impulsive, Wave B is corrective, and Wave C is

impulsive again.

3. How does a flat correction differ from a zigzag?

 A flat is a 3-3-5 where Waves A and B are corrective, and Wave C is impulsive. Flats are
typically more sideways than zigzags.

4. What is an expanded flat and in which conditions does it form?

 In an expanded flat, Wave B exceeds the start of Wave A, and Wave C extends beyond
Wave A’s end. It forms during strong trends when reactions are exaggerated.

5. Define a triangle correction and list its types.

 A consolidating 5-wave pattern labeled A-B-C-D-E. Types include:

o Contracting triangle
o Expanding triangle
o Symmetrical
o Running
o Barrier

6. What is a combination correction? How can it be identified?

 A complex correction combining two or three patterns: W-X-Y or W-X-Y-X-Z.

Identified when a single correction doesn’t fit a standard structure.

7. How can one determine when a corrective wave is complete?

 Completion often aligns with:

o End of Wave C or E.
o Fibonacci retracement levels.
o Divergence in momentum.
o Breakout of trendline or triangle boundaries.
 

📐 Chapter 4: Fibonacci Ratios and Guidelines — Answers

1. What Fibonacci ratios are most relevant to impulse waves?

 161.8%, 261.8%, 100% — especially for projecting Wave 3 and Wave 5.

2. What are common Fibonacci retracement levels for corrective waves?

 38.2%, 50%, and 61.8% — common retracement zones for Waves 2 and 4.

3. Which wave is often 161.8% the length of another? Give examples.

 Wave 3 is commonly 1.618x the length of Wave 1, especially in strong trends.

4. How do Fibonacci extensions help in wave projection?

 Extensions help project target zones for Wave 3 or Wave 5 based on prior wave lengths
using ratios like 1.618, 2.618, etc.

5. What is the typical Fibonacci relationship between Wave 1 and Wave 5?

 Wave 5 is often equal to Wave 1 (100%) or 1.618x Wave 1, especially if Wave 3 is

extended.

6. Explain how to project a Wave C in a zigzag using Fibonacci tools.

 Measure the length of Wave A, project it from the start of Wave C:

o Common targets: 100%, 161.8%, and 261.8% of Wave A.

7. Discuss the application of Fibonacci clusters in identifying reversal zones.

 Multiple Fibonacci projections (from different wave relationships) converging at the

same price zone form a cluster, increasing the likelihood of a reversal.
Chapter 5: Practical Application and Wave Counting — Answers

1. What are the basic steps in performing an Elliott Wave count?

 Identify the trend: Determine the direction of the larger trend.

 Label wave degrees: Use proper wave degrees (e.g., Primary, Intermediate, Minor).
 Spot motive and corrective waves: Look for clear 5-wave (impulse) and 3-wave
(corrective) structures.
 Validate rules: Ensure impulse waves follow rules (e.g., Wave 3 not the shortest, Wave
4 doesn’t enter Wave 1 territory).
 Apply guidelines: Use guidelines like alternation and Fibonacci ratios to refine the
count.
 Reassess continually: Adjust the count as new price data comes in.

2. How can one differentiate between an impulse and a corrective wave in real time?

 Impulses are directional, strong, and follow the trend, with a 5-wave structure.
 Corrective waves are choppy, overlapping, and move against the trend, usually
forming 3-wave (ABC) patterns.
 Volume and momentum typically increase in impulses and wane in corrections.

3. What are common mistakes traders make when counting waves?

 Forcing a count to fit a preconceived bias.

 Mislabeling corrective waves as impulsive, or vice versa.
 Ignoring Elliott Wave rules (e.g., allowing Wave 3 to be the shortest).
 Failing to account for wave degrees.
 Not reassessing the wave count when invalidation levels are breached.

4. How do you apply the principle of multiple degrees in practice?

 Wave patterns exist within larger wave structures—like fractals.

 A small 5-wave move on the 15-minute chart might be part of Wave 1 of a larger
structure on the daily chart.
 Use multiple timeframes to label nested waves (e.g., Minute, Minor, Intermediate) and
maintain consistency across degrees.
5. Describe how alternation helps in predicting future wave behavior.

 The Guideline of Alternation suggests that if Wave 2 is sharp and deep, then Wave 4
will likely be sideways and shallow—and vice versa.
 It helps forecast the form and complexity of future corrective waves, aiding timing and
strategy.

6. What supporting indicators can improve the accuracy of a wave count?

 Fibonacci retracements/extensions: To project wave targets.

 RSI/MACD: Confirm momentum or show divergence near wave terminations.
 Volume: High volume supports impulse waves; lower volume is common in corrections.
 Moving Averages/Trendlines: Help confirm trend structure or spot breakouts.

7. How can wave failure (e.g., truncated fifth) be identified and interpreted?

 A truncated fifth occurs when Wave 5 fails to exceed the end of Wave 3.
 Often seen after an extended Wave 3, followed by a weak Wave 5.
 Indicates exhaustion of trend or sharp reversal potential.
 Typically confirmed with momentum divergence (e.g., RSI fails to confirm new
highs/lows).
Chapter 6: Advanced Patterns and Market Psychology —
Answers
1. What is a triangle within a triangle? Give an example of its implication.

 A triangle within a triangle occurs when each subwave of a larger triangle also forms a
smaller triangle. It indicates extended indecision and often leads to explosive
breakouts.

2. How does wave personality help in identifying wave positions?

 Each wave has a typical “personality”:

o Wave 1: tentative
o Wave 2: sharp retracement
o Wave 3: explosive & high volume
o Wave 4: sideways and choppy
o Wave 5: final push with weakening momentum

3. What is a running flat, and what market sentiment does it suggest?

 A running flat has Wave B exceeding Wave A and Wave C failing to reach A’s end. It
shows strong underlying trend and momentum.

4. Explain the concept of “extension” in impulse waves and where they usually occur.

 An extension occurs when one impulse wave subdivides into its own 5-wave structure,
making it longer than others. Usually in Wave 3 or Wave 5.

5. In what ways does crowd sentiment shift from Wave 3 to Wave 5?

 Wave 3: smart money drives price, strong fundamentals, high volume

 Wave 5: public euphoria, low momentum, divergence, and usually volume drop-off

6. How do you identify a double or triple three correction?

 Labeled as W-X-Y (double) or W-X-Y-X-Z (triple). Identified by:

o Sideways movement
o Multiple corrective patterns joined by X waves
o Lack of clear impulsive moves

7. How would you interpret a complex correction that defies typical labels?

 Apply a flexible, guideline-based approach:

 o Recognize if it’s a combination
o Revisit wave degree and alternate scenarios
o Use supporting tools like Fibonacci levels, volume, and trendlines to clarify
structure

Chapter 7: Integration with Other Technical Tools — Answers

1. How does Elliott Wave complement trendlines and channels?

 Trendlines help define the boundaries of impulse and corrective waves.

 Elliott Wave counts often form within price channels—for example:
o Draw a trendline connecting Wave 2 and 4, then parallel it through Wave 1 or 3 to
project Wave 5.
 Channels can signal the end of Wave 5 when price pierces or exhausts at the upper/lower
boundary.

2. Describe how RSI or MACD might support a wave count.

 RSI divergence: If price makes a new high (Wave 5) but RSI doesn’t, it may signal trend
exhaustion.
 MACD crossovers: Often confirm the start of a new wave, especially impulsive ones.
 Zero line cross in MACD: Can help distinguish between motive (strong movement) and
corrective waves (weak/no crossover).

3. How can Elliott Wave be used alongside volume analysis?

 Volume typically increases in impulse waves and decreases in corrections.

 Wave 3 often shows the strongest volume surge.
 Volume divergence in Wave 5 (lower volume than Wave 3) supports the idea of a
terminal wave.
 Volume spikes during breakouts from corrective patterns (like triangles) can validate the
count.

4. What role does divergence play in wave termination?

 Momentum divergence (e.g., price makes a new high, but RSI/MACD does not) is a
classic sign of:
o A truncated fifth wave.
o A potential trend reversal.
 Bullish divergence can mark the end of Wave C in a corrective structure.
 Divergence adds confidence to identifying terminal points in impulse and corrective
patterns.

5. How would you combine Elliott Wave with candlestick patterns?

  Candlestick patterns (like engulfing, doji, hammer) can confirm the end of a wave,
especially:
o At Wave 2 or Wave 4 retracements.
o At the completion of Wave C or Wave 5.
 Reversal candlestick signals aligned with Fibonacci levels or wave counts improve
entry/exit accuracy.
 Clustering wave-end predictions with candlestick confirmation increases reliability.

6. Can Elliott Wave be reconciled with classical chart patterns (e.g., head and shoulders)?

 Yes. Classical patterns often form within wave structures:

o A Head and Shoulders top might occur at the end of Wave 5 or during a
complex Wave B.
o Triangles in Elliott Wave can align with continuation patterns in classical
analysis.
 Elliott Wave gives a contextual layer to these patterns, improving the ability to
anticipate rather than just react.

7. Discuss the use of Elliott Wave in algorithmic or rule-based systems.

 While subjective, wave principles can be codified using:

o Fibonacci ratios for wave projections.
o Momentum divergence rules.
o Pattern recognition for wave structures (e.g., 5-3-5 for zigzags).
 Algorithms may use wave count logic alongside AI/ML to simulate subjective
decisions.
 Rule-based systems can filter invalid counts, identify probable wave patterns, and
improve strategy automation.