Recently, I’ve been reviewing Elliott Wave Theory again and found that many people still have misconceptions about this system. Rather than saying that Elliott Wave was created, it’s more accurate to say that it’s a discovery of market规律.

The core logic is actually very simple: 5 waves of impulse plus 3 waves of correction form a complete 8-wave cycle. Impulse waves drive the main trend, while corrective waves are retracements and corrections. But the market is far more complex than the ideal model; sometimes a certain wave becomes unusually long, which is called an extension wave, and it can be broken down into several smaller waves.

I’ve noticed that many traders tend to overlook the details of the abc waves. In the correction waves, wave B must retrace at least 61.8% of wave A, which is key for flat-type waves. If wave A doesn’t look like a basic wave, then it must be a corrective wave, and you should check whether the 61.8% retracement condition is met.

There are three fundamental principles of Elliott Wave Theory that must not be broken: the duration of wave 3 cannot be the shortest among waves 1, 3, and 5; wave 2’s correction cannot exceed the starting point of wave 1; and the bottom of wave 4 cannot go below the high of wave 1. Once these are satisfied, the theory is truly valid, and predicting corrections becomes easier. But even if these conditions are met, the trend may not always move strictly according to the rules, so stay alert.

There are three golden rules for bullish and bearish markets. In a bull market, wave 2’s low cannot fully retrace below wave 1’s low; wave 3 is usually the longest impulse wave; wave 4’s low cannot overlap with the peak of wave 1. In a bear market, wave B’s rebound will always be smaller than wave A’s peak; wave C is usually large and takes a long time, with high volume; and the highest point of wave C’s rebound cannot overlap with wave A’s lowest point. When you notice the price action contradicts these rules, you should be more cautious.

Regarding practical trading, there are three key methods. The first is trading the third wave, because in basic wave structures, at least one wave is extended and must be over 161.8% of the other non-extended waves. Usually, the third wave becomes the extension, and wave 2 may retrace to about 50%-61.8% of wave 1, which is an ideal trading opportunity. In bullish basic waves, set buy limit orders between 50% and 61.8% of wave 1, with take profit around 161.8% of wave 2.

The second method is trading flat-type waves. Flat corrections often form, and they all share the characteristic that wave B must retrace at least 61.8% of wave A. The key is to analyze whether wave A is a basic wave or a correction wave, then look for the 61.8% retracement condition.

The third method is trading the fifth wave, but it carries higher risk. Elliott Wave traders compare the length of wave 1 and wave 5. If wave 5 is only 61.8% of wave 1, then in a bullish five-wave structure, it’s a good opportunity to short, with stop-loss placed at the end of the extension wave.

Here’s a very practical tip: combine Fibonacci retracement lines. During an uptrend, retracements occur, but at what price levels do they happen? After a retracement, where does the price stop? Although Elliott Wave doesn’t have strict规律, there are general standards. By connecting the highest and lowest prices with Fibonacci retracement lines, you can grasp support levels after retracements or resistance after rebounds. Most traders focus on key levels like 23.6%, 38.2%, and 61.8%.

In short, mastering Elliott Wave Theory is like mastering breathing techniques. You need to understand what you’re doing and know your position in the wave cycle. When you clearly identify where you are in the wave structure, your trading rhythm won’t be disrupted. The market changes rapidly, and Elliott Wave Theory helps us discover these fluctuations. Coupled with psychological awareness and strategic play, a clear wave understanding allows traders to handle various market conditions with ease.