What is a wave cycle in Elliott Wave Theory?

  

 In Elliott Wave Theory, a wave cycle is a complete sequence of price movement that includes both an impulse phase and a corrective phase. This cycle captures the progression of a market trend and its subsequent correction, following the basic structure of the theory. Here’s a detailed breakdown:

 

1. Impulse Phase (5 Waves)

This phase moves in the direction of the primary trend and is composed of five waves:
- Wave 1: The first wave in the new trend direction, often modest as it represents the initial change in market sentiment.
- Wave 2: A corrective wave that retraces a portion of Wave 1, typically by 38.2%, 50%, or 61.8%.
- Wave 3: Usually the strongest and longest wave, driven by increasing investor enthusiasm and higher trading volume. It often extends 161.8% of Wave 1.
- Wave 4: A corrective wave that retraces a portion of Wave 3, usually less volatile and often not overlapping with the price range of Wave 1.
- Wave 5: The final impulse wave in the trend direction, often marked by diminishing momentum compared to Wave 3.

 

2. Corrective Phase (3 Waves)

This phase moves against the direction of the primary trend and is composed of three waves:
- Wave A: The initial counter-trend move, which can be a sharp decline if the preceding trend was upward.
- Wave B: A partial retracement of Wave A, often making the market appear as if it will continue in the original trend direction.
- Wave C: The final move in the correction, typically at least as long as Wave A, completing the correction phase.

 

Complete Wave Cycle

A full Elliott Wave cycle thus includes:
- 5-wave Impulse Phase: Moves in the direction of the larger trend.
- 3-wave Corrective Phase: Moves against the direction of the larger trend.

In summary, the full Elliott Wave cycle of 8 waves (5 impulse + 3 corrective) reflects the natural ebb and flow of market trends and corrections. These cycles can be observed on various time scales, from minutes to decades, and are fractal in nature, meaning smaller wave cycles can be found within larger wave cycles.

 

Visual Representation

- Impulse Cycle: Wave 1, Wave 2 (correction of Wave 1), Wave 3, Wave 4 (correction of Wave 3), Wave 5.
- Corrective Cycle: Wave A, Wave B (partial retracement of Wave A), Wave C.

Each complete cycle sets the stage for the next cycle to begin, following the fractal pattern observed in the markets. This cyclical pattern is fundamental to Elliott Wave Theory's approach to analyzing and predicting market behavior.

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