Chapter 2: Breaking Down Elliott Wave StructureApple Inc.BATS:AAPLBrightRally_ResearchIndex: Chapter 1: Mastering the Basics of Elliott Wave Chapter 2: Breaking Down Elliott Wave Structure In the previous chapter, we learned how Elliott waves are formed, how the wave principle is used, and the psychology behind trader decisions. Elliott Wave Structure: ----------------------------- 1. Bullish structure Fig: The structure shown above represents a bullish wave cycle. It has five upward-moving waves, followed by three downward corrective waves. Altogether, the pattern is made up of 8 waves (5 upward + 3 downward). 2. Bearish Structure Fig: The structure shown above represents a bearish wave cycle. It includes five downward-moving waves, followed by three upward corrective waves. In total, the pattern consists of 8 waves (5 downward + 3 upward). You may have a lot of questions in your mind, but let’s clear up some common doubts about Elliott Wave Theory. 1. Elliott Wave Theory works on all time frames, from short-term charts to long-term charts. 2. The 5+3 wave structure helps traders understand market trends, trend strength, and possible reversals. 3. If applied correctly, Elliott Wave Theory can provide around 84% accuracy in market analysis. As we know, Elliott Wave Theory is based on an 8-wave structure. It includes 5 waves in the impulse phase and 3 waves in the corrective phase. To make the wave principle easier to understand, we divide the structure into two parts: the impulse phase and the corrective phase. Fig: This picture shows the two phases of the Elliott Wave Principle. The impulse phase has 5 waves, while the corrective phase has 3 waves. To understand the wave principle more clearly, the wave structure is divided into these two separate phases. The Wave Principle is a method used by traders and investors to understand how the market moves. It divides the market into two main phases: the Impulse phase and the Corrective phase. 1. The Impulse phase has 5 waves that move in the direction of the main trend. In a bull market, the waves move upward, and in a bear market, they move downward. This phase shows the main strength of the market trend. 2. The Corrective phase has 3 waves that move against the main trend. In a bull market, the correction moves downward, and in a bear market, it moves upward. This phase is a temporary pullback where traders may book profits or change their positions. By understanding these two phases, traders and investors can better identify market trends and make smarter buying or selling decisions. It also helps them understand possible future market movements. Fig: The Elliott Wave Principle explains market trends in two phases: the motive/impulse phase and the corrective phase. The impulse phase shows the main directional movement of the market, while the corrective phase shows a temporary move against the main trend. These phases are further divided into two types of waves: impulsive waves and corrective waves. To better understand the Elliott Wave Principle, it is important to study the impulse phase closely. Understanding its structure and wave behavior helps traders and investors spot opportunities and make better decisions. Impulse Phase -------------------- 1. The motive or impulse phase is made up of five waves: 1, 2, 3, 4, and 5. 2. These waves move in the same direction as the overall market trend. 3. Once the impulse phase ends, the corrective phase begins. Both phases are linked and appear one after the other. 4. Compared to the corrective structure, the impulse structure is usually stronger and shows greater momentum. 5. The impulse phase contains two different types of waves: Impulse waves (1, 3, and 5): These waves move with the main trend. Corrective waves (2 and 4): These waves move against the main trend for a short period.This is only a simple overview, and we will understand each wave in detail later. Impulsive waves move in the direction of the main trend and can appear in both bullish and bearish markets. In a bullish phase, they are labeled as waves 1, 3, and 5, while in a bearish phase, they are labeled as waves A and C. These waves are strong trend-forming moves driven by market momentum and trader sentiment. By identifying impulsive waves, traders can spot trends early and make better trading decisions. Corrective waves move against the main trend and are also seen in both bullish and bearish markets. They are labeled as waves 2, 4, and B. These waves represent temporary pullbacks or pauses before the main trend continues. Corrective waves usually happen when the market tries to balance the strong movement created by impulsive waves. Recognizing these waves can help traders find better entry or exit points before the trend resumes Fig: Waves 1, 3, and 5 are impulsive waves in an upward-trending impulse phase because they move in the direction of the trend and show upward momentum. On the other hand, waves 2 and 4 are corrective waves because they move against the main trend. In a bearish impulse phase, these waves create temporary upward corrections against the overall downward market trend. This behavior is a normal characteristic of the motive or impulse phase in a bear market. Fig: Waves 1, 3, and 5 are impulsive waves in a downward-trending motive/impulse phase because they move in the direction of the main trend and show downward movement. On the other hand, waves 2 and 4 are corrective waves because their upward movement goes against the overall downward market trend. These waves represent temporary pullbacks during a bearish impulse phase. Correction/Corrective Phase ------------------------------------ Key Points About the Corrective Phase: 1. The corrective phase is formed by three waves: A, B, and C. 2. This phase represents a temporary movement against the main market trend. It usually appears in a three-wave pattern known as A-B-C. 3. When the corrective phase ends, a new impulse phase begins, creating a repeating cycle in the market. 4. In a bullish market, waves A and C move in the direction of the correction (downward), while wave B moves against the correction trend (upward). This type of movement is commonly seen during market pullbacks. Fig: Waves A and C are impulsive waves in the corrective phase because they move in the same direction as the correction trend, which is downward. Impulsive waves always follow the main trend of the phase. On the other hand, Wave B is a corrective wave because it moves upward against the downward trend of the corrective phase. Fig: Waves A and C are impulsive waves in the corrective phase because they move in the same direction as the correction trend, which is upward. Impulsive waves always follow the direction of the current phase trend. On the other hand, Wave B is a corrective wave because it moves downward against the upward trend of the corrective phase. Note: The overall market trend is bearish, so the correction phase moves upward against the main downtrend. This creates a temporary uptrend within the correction phase. Concept of Sub-Waves ----------------------------- A key idea in Elliott Wave Theory is that larger wave patterns are made up of smaller waves that follow the same structure. These smaller waves can be divided into even smaller waves, creating a repeating pattern across different timeframes. This concept applies to both upward impulse moves and downward corrective moves in the market. To study market behavior, Elliott used nine time divisions, ranging from very large cycles lasting years to smaller movements seen within hours. The time divisions used can vary depending on the market and the period being analyzed. In simple words, market movement can be broken into smaller wave patterns, and these smaller patterns combine to form bigger trends. This repeating structure helps traders understand how prices move across different timeframes. The wave structure shows how smaller waves form inside larger waves, creating a repeating pattern across different market movements. In the impulse phase, waves 1, 3, and 5 move in the direction of the main trend and are known as impulsive waves, while waves 2 and 4 move against the trend and act as corrective waves. Similarly, in the corrective phase, waves A and C move in the direction of the correction and behave as impulsive waves, while wave B moves against the correction and acts as a corrective wave. Wave 1 moves upward, which shows an impulsive trend. This means Wave 1 is made up of five smaller sub-waves that follow the same Elliott Wave structure. When we zoom in further, each of these sub-waves can also be broken down into smaller wave patterns. For example, sub-wave 1 can itself form another five-wave impulse structure. This idea is important in trading because it helps traders understand market behavior and identify possible future price movements. A simple way to understand this is by thinking about the ocean. The ocean is made of waves, and each wave is made of smaller ripples, while tides influence the overall movement. In the same way, financial markets move in larger trends, but these trends are made up of smaller price movements, which are further divided into even smaller movements. By studying these smaller wave structures, traders can spot potential buying and selling opportunities and make better decisions about future market direction. Fig: every wave 1, 2, 3, 4, and 5 can be divided into smaller waves of its own. These smaller waves are usually marked with smaller numbers or letters. This creates a wave inside a wave pattern that helps traders and analysts understand market movements better and identify possible buying or selling opportunities. Impulsive waves, which include waves 1, 3, 5, A, and C, contain a five-wave sub-structure within them. This means that each impulsive wave can be divided into five smaller waves, no matter the degree or timeframe. On the other hand, corrective waves, which include waves 2, 4, and B, contain only a three-wave sub-structure. This happens because impulsive waves carry stronger market momentum and move in the direction of the main trend, creating a more detailed wave structure. Corrective waves are weaker and move against the trend, so their internal structure is usually simpler. Wave Degree: ------------------ The Elliott Wave Theory explains that financial markets move in repeating cycles of five upward waves followed by three downward waves. These waves are grouped into different sizes, known as Elliott Wave Degrees. The theory includes fifteen wave degrees, from the smallest to the largest. Smaller degrees, such as Miniscule, Micro, and Sub-minuette waves, are mainly used in short-term trading. Medium-sized degrees like Minuette, Minute, and Minor waves are commonly used for medium-term analysis. Larger degrees, including Intermediate, Primary, and Cycle waves, are used for long-term market analysis. The biggest degrees, such as Super cycle and Grand Super cycle waves, can last for many years and are mostly used by long-term investors and analysts. In the next chapter, we will learn about the basic rules of the Elliott Wave Principle. The Hidden Logic of Elliott Waves By @BrightRally_Research on @tradingview Platform