FOREX PROFITS

WITH
ELLIOTT WAVE
Getting Up to Speed on Elliott Wave

Frank Paul
&
The Forexmentor Team

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WHAT IS IT?
Simply put, Elliott Wave is the most profoundly insightful form of financial market technical analysis ever
invented. Elliott Wave (EW) theory was first formulated by Ralph Nelson Elliott in the 1930s, and in recent
decades has been greatly expanded upon and refined by Robert Prechter and his organization Elliott Wave
International. EW theory provides the trader an impressively insightful framework for assessing marketplace
dynamics as revealed by crowd psychology; as well as a practical set of tools for identifying and managing
viable trading opportunities that exploit these dynamics.

Because EW theory is both comprehensive in scope and substantial in content, it is beyond the scope of this
report to be able to train you in how to trade Elliott Wave. What we can do, is very briefly introduce some of
the basic principles and concepts, and then steer you in the right direction in terms of learning resources you can
consult to develop your knowledge base in this fascinating area.

While facility with EW theory does take time and effort, the payoff awaiting you is a greatly expanded
understanding of how the various ‘waves’ in price action can be explained and understood in relation to a
framework that is both repetitive in nature, and fractal (meaning self-similar across various timeframes at once).
At the end of the day, EW is most of all about patterns and pattern recognition – being able to see on your chart
certain biases in price action which might otherwise look chaotic or random. To know what an Elliott pattern
looks like, to see it developing real time, to understand what it means and how to trade it, can give you a
powerful sense of clarity that may be hard to find by other means.

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IMPULSES AND CORRECTIONS – THE
BASICS
The best way to distill the complexity of EW theory down into simple ideas is to begin by noting that all price
action unfolds in waves. Even the least experienced trader will quickly understand this idea when analyzing a
price chart for the first time: for a while price goes up (or down), then seems to reverse direction for a while,
then eventually continues on in the previous direction. Sometimes there appears to be no consistent direction, it
just goes up and down. Regardless, each of these gyrations on the chart can be thought of as a wave.

One of Elliott’s first and most powerful insights was that these waves seem to follow patterns delineated in fives
and threes; that is, five-wave groups combining together in a certain relation to trend, and three-wave groups
combining in a different way in relation to trend. This is significant because five-wave patterns always align
with trend, while three-wave patterns can always be regarded as corrective in nature, meaning they unfold
against the trend.

Five-wave patterns (also called Impulse patterns) take on a generic progression as depicted below:

FIGURE 1 – GENERIC IMPULSE PATTERNS

5
2
3
4
1 1
4
3
2
5
NowFive-wave impulse pattern in an uptrend Five-wave impulse pattern in an downtrend

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Now, the first thing to bear in mind is that textbooks are one thing, reality is another. While impulse patterns
are a beautiful thing to behold in the live trading environment, seldom do they reveal themselves with the
perfect simplicity shown above. They unfold according to differing proportions, some of them break down into
aggregations of smaller patterns (which can make the process of counting and labeling the waves challenging),
and so on. However, an eye trained in EW can usually see the order in the chaos and make sense of the impulse
pattern templates depicted above.

What we see in Figure 1 is that in both scenarios – uptrending and downtrending markets – it is waves 1, 3 and
5 which mark progress in the direction of the trend (green arrows in the left panel, red arrows in the right),
while waves 2 and 4 represent an interruption in that progress, i.e. counter-trend development. The importance
of this relationship is that when you can tell where you are in the structure at any given time, you know what to
look for as price action develops – you can proactively anticipate (for example, buying the termination of a
counter-trend wave 2 in an uptrend, or covering shorts at the end of a wave 5 down).

To put this concept in a more realistic context, below is an actual Forex price chart example of a five-wave
impulse pattern in a downtrend, with each major wave labeled accordingly (an example of a so-called
‘Truncated Fifth’, where the end of wave 5 is not substantially further than the end of wave 3):

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 FIGURE 2 – A FIVE WAVE IMPULSE IN THE REAL WORLD

We noted above both that waves 2 and 4 within impulses are corrective, and that 3-wave patterns are also
corrective. Guess where that leads us? That’s right, the inevitable conclusion that each of waves 2 and 4 are
often (but not always) comprised of smaller 3-wave corrective patterns within the broader structure. In actuality,
there is quite a variety of these patterns, and combinations thereof (so-called Double Threes and Triple Threes),
but to keep things simple, we’ll mention the most common category known as flats.

A flat is simply a correction that is more or less rangebound from high to low, and always contained with the
range of the preceding wave; that is, never retracing more than 100% of its distance traveled. In the generic
examples below, please note that the wave labeling convention changes from numbers (used for impulse
patterns) to letters, typically A (the first wave in the pattern), B, then C:

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 FIGURE 3 – GENERIC FLAT CORRECTIVE PATTERN IN AN UPTREND

B B

A C
A C

The diagram above left shows us the generic directionality of a flat in an uptrend: the prior impulse wave
terminates then turns down into wave A (first red arrow) which retraces a portion of the preceding wave. Price
then bounces back up into wave B which happens to match the trend, but it subsequently fails to maintain the
momentum required to achieve sustained, new highs. Price then falls back down again into wave C, the third of
the sequence, and upon finding support – typically in or close to the range of the ‘A’ wave bottom – turns the
corner marking both the end of the correction and the start of the next wave up in the impulse pattern.

The diagram above right takes the corrective sequence left and breaks down the A-B-C waves into their
components parts. What we see here is that waves A and B are each comprised of 3 smaller waves, while wave
C is comprised of 5 smaller waves (a mini impulse in the counter-trend direction). Overall, this gives us the
delineation of 3-3-5. In other words, when you watch this type of flat correction unfold in real time, you count
out the waves as each major swing point develops, and within each of waves A and C you have three smaller
waves, followed by five within wave C.

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The chart example below provides a realistic example of what a flat corrective pattern in a downtrending market
looks like:

FIGURE 4 – ACTUAL FLAT CORRECTIVE PATTERN IN A DOWNTREND

In the above example we can see that price collapsed into wave 1 of the downtrend, then within the flat
corrective pattern in the wave 2 position, we had an A wave up, followed by a B wave down, then a C wave up
which retraced only a portion of the prior A wave. All of this action was contained within a sideways, ‘flat’
price sequence (thus the name) before the trend resumed. The component wave structure cannot be seen on this
chart timeframe, so we drill down to lower timeframes until we find it.

Most traders don’t realize it, but the usage of Fibonacci retracements, extensions and expansions was a direct
result of the pioneering work of R.N. Elliott. In fact, it seems that Elliott’s discovery of the applicability of the
Fibonacci number sequence to market analysis was inevitable, since he proved that price moves in patterns of
fives and threes, five and three are the first two additive members of the Fibonacci number sequence, and ratios
thereof give us both the all-important ‘Golden Mean’ (or phi: 1.618…) and the levels traders work with
regularly for measuring Fibonacci retracements.

One of the main ways Fibonacci becomes practical and useful is in helping us to measure the extent of
corrective sequences: when we see a pullback against the prevailing direction in price, we can draw Page 7 of 10
a Fibonacci structure on our charts confirming the terminus of individual waves against Fib support levels, the
most common being 38.2%, 50% and 61.8%. As price moves within this so-called ‘Fibonacci target zone’, we
can look for the individual waves to develop within the corrective sequence.

Below is the same chart example from Figure 2 above, this time with Fibonacci applied to each of the corrective
waves. In both cases, Fibonacci levels provided a startlingly precise measurement for the termination of each of
these waves (the 61.8% Fib retracement for wave 2, and a 50% for wave 4):

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SOUNDS GREAT – HOW CAN IT HELP ME?
If the above examples sound like a lot of theory, take heart. Yes, to master EW you will have to knuckle down
and learn the theory, there’s no way around it. But once you start applying it to real-world charting examples
you’ll eventually find the analytical framework becomes almost second nature to you.

Here are just a few of the ways EW analysis can help you in live trading:

Ø Identify long-term, significant reversal points in the market. How: a 5-wave count on a lower level
timeframe (e.g. 4hr, 60m) completing the final sequence of a 5-wave count on a higher level (e.g. Daily,
Weekly) with fundamentals aligned in favor of a reversal.

Ø Project the extent of a major trending market and anticipate reversals. How: using Fibonacci extension
tools and EW principles of wave formation and proportion, develop reliable projections of the maximum
extent of the market’s current trend cycle.

Ø Understand flat or counter-trending price action in relation to a framework that makes sense, and avoid
being ‘spooked’ out of a good trade by pullbacks of limited significance (instead of running scared the
way less experienced traders often do). How: using Fibonacci retracement tools and EW pattern
recognition, navigate through corrective sequences.

Ø Identify excellent entry points to add to your position in a trending market. How: on termination of
corrective waves 2 and 4 in a trending market (determined with wave pattern analysis and Fibonacci)
look to add to your position with limited risk.

Ø Think independently and be able to see though mainstream news clutter which all too often assigns the
wrong explanations to price action after the fact. How: as EW theory is based on an objective
assessment of crowd psychology (as revealed by repetitive, fractal patterns), you learn to stand outside
that psychology and avoid the herding behavior of the markets.

Ø Serve as an excellent supplement to the tools of technical analysis and trading taught at Forexmentor.

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HOW DO I GET STARTED?
Below are listed some excellent resources to help you become familiar with EW theory. Take the time to digest
and fully understand the material, then apply it in backtesting mode and then demo trading mode and over time
it will become second nature to you.

1) Read this book: Elliott Wave Principle: Key to Market Behavior, by Robert Prechter and A.J. Frost,
available at Amazon or any major book retailer. The latter chapters in the book can be a bit esoteric for
a first read through, so it’s suggested that you just read, re-read and then read again chapters 1-3. This
portion of the book gives you all the practical knowledge to get started. An absolute must-read for
anyone wanting to understand EW and Fibonacci.

2) Visit this website: www.elliottwave.com. Here you will find an impressive array of specialty courses,
publications, and other books authored by Robert Prechter and his team of analysts. You can get a free
membership which gives you a weekly free newsletter. In addition, it is highly recommended that you
check out at least one of the regular paid subscription newsletters (costing only about $20/mo each)
including either the Elliott Wave Theorist or the Elliott Wave Financial Forecast, both of which
providing you world-class EW assessment of financial market conditions in clear ‘layperson’s’
language.

3) Check out Frank Paul’s Forexmentor service called Forex Profits with COT. This service combines
Commitments of Traders data with detailed, hands-on EW analysis of a total of 10 Forex markets and 3
bonus markets provided by way of a weekly video analysis.

4) Practice, practice, practice! Once you’ve taken the time to understand the patterns, rules and guidelines
of EW theory, you need to then apply it in the real world, which is best done by marking up lots and lots
of charts and assessing your work.

If you have any questions or comments about this subject, please feel free to email me at
frank@forexmentor.com.

Best Wishes,
Frank Paul
Forexmentor.com
BE SURE TO VISIT WWW.FOREXMENTOR.COM FOR ADDITIONAL FOREX EDUCATION RESOURCES.

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