Trading Right Side using Elliott

Wave Theory, Cycles and

Sequences
October 7, 2018

Presented by: Eric Morera

• www.elliottwave-forecast.com

October 2018 | www.elliottwave-forecast.com

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 Trading Right Side using Elliott Wave Theory, Cycles and Sequences

Elliott wave Theory Swings & Sequences

01 ▪ Impulse Structures
▪ Fibonacci Extensions / Relationships
▪ Corrective Structures 02 ▪
▪
▪
▪
Mortive Sequence
Corrective Sequence
Swing Counts
Identifying type of Sequence
▪ Bullish / Bearish Sequence

Cycles & Correlations Identifying and Trading Right Side

03 ▪
▪
▪
▪
▪
Relating Cycles across instruments / groups
Types of Correlation
1st Degree Correlation
2nd Degree Correlation
Relating Cycles using different degrees of correlation
04 ▪
▪
▪
▪
How to Identify The Right Side
Trading the Right Side
Trading Impulse Sequence
Trading Corrective Sequence

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01 - Elliottwave Theory
▪ Impulse Structures
▪ Fibonacci Extensions / Relationships
▪ Corrective Structures
01. Elliottwave Theory
History
▪ The Elliott Wave Theory is named after Ralph Nelson Elliott. Inspired by the Dow Theory and by observations found throughout
nature, Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive
pattern of waves. In fact, Elliott believed that all of man's activities, not just the stock market, were influenced by these identifiable
series of waves

▪ Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed
market predictions based on the patterns Elliott based part his work on the Dow Theory, which also defines price movement in
terms of waves, but Elliott discovered the fractal nature of market action

▪ In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns. His primary research was
with stock market data for the Dow Jones Industrial Average. This research identified patterns or waves that recur in the
markets. Very simply, in the direction of the trend, expect five waves. Any corrections against the trend are in three waves. Three
wave corrections are lettered as "a, b, c." These patterns can be seen in long-term as well as in short-term charts

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01. Elliottwave Theory
History (continued)
▪ Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the
smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. This information (about smaller patterns
fitting into bigger patterns), coupled with the Fibonacci relationships between the waves, offers the trader a level of anticipation
and/or prediction when searching for and identifying trading opportunities with solid reward/risk ratios

▪ In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of
trend. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective
character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3

▪ Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another
impulse. In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up

▪ In the new theory of Elliottwave (EWF), the market trends in both corrective and impulse sequence which is a huge
difference compared to the old theory

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01. Elliottwave Theory
Fibonacci Ratios
▪ Leonardo Fibonacci was a 13th century accountant who worked for the royal families of Italy. In 1242 he published a paper
entitled "liber abaci." The basis of the work came from a two-year study of the pyramids at Gizeh
▪ Fibonacci found that the dimensions of the pyramid were almost exactly the same as the golden mean or (.618)
▪ Fibonacci is most famous for his Fibonacci Summation Series which enabled the Old World in the 13th century to switch from
Arabic numbering (XXIV=24), to the arithmetic numbering (24), that we use today. For his work in mathematics, Fibonacci was
awarded the equivalent of today's Nobel Prize

Fibonacci Summation Series

▪ The Fibonacci Summation Series takes 0 and adds 1. Succeeding numbers in the series adds the previous two numbers and
thus we have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to infinity. At the eighth series, by dividing 55 by 89, you have the golden mean:
.618. If you divide 89 by 55 you have 1.618
▪ Do you see the pattern? 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13.....
▪ These ratios, and several others derived from them, appear in nature everywhere, and in the financial markets they often indicate
levels at which strong resistance and support will be found. They are easily seen in nature (seashell spirals, flower petals,
structure of tree branches, etc.), art, geometry, architecture and music

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01. Elliottwave Theory
Fibonacci Ratios

▪ 61.8% (0.618) ▪ 261.8% (2.618)

▪ 100% (1.00) ▪ 323.6% (3.236)
Extensions ▪ 123.6% (1.236) ▪ 423.6% (4.236)
▪ 161.8% (1.618) ▪ 681% (6.81)
▪ 200% (2.00)

▪ 14.6% (0.146) ▪ 85.4% (0.854)

▪ 23.6% (0.236)
Retracement ▪ 38.2% (0.382)
▪ 61.8% (0.618)
▪ 76.4% (0.764)

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01. Elliottwave Theory
Elliott Wave Structures - Impulse

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01. Elliottwave Theory
Impulse Structure Rules
▪ Impulse wave subdivides into 5 waves
▪ Wave 1, 3, and 5 subwaves are themselves impulse
▪ Wave 2 can’t retrace more than the beginning of wave 1
▪ Wave 3 can’t be the shortest
▪ Wave 4 can’t overlap with wave 1 and never more than 50% of wave 3
▪ Wave 5 needs to come with momentum (RSI) divergence

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01. Elliottwave Theory
Impulse Structure - Fibonacci Relationships
▪ Wave 2 = 50%, 61.8%, 76.4%, or 85.4% of wave 1
▪ Wave 3 is typically 161.8% of wave 1-2, but can also be 200%, 261.8%, 323.6% of wave 1-2
▪ Wave 4 = 14.6%, 23.6% or 38.2% of wave 3 but no more than 50%
▪ Wave 5 = wave 1 or 61.8% of wave 1-3, or 123.6% - 161.8% of wave 4

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01. Elliottwave Theory
Impulse Structure – 5 Waves Pattern in Bullish Market

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01. Elliottwave Theory
Impulse Structure – 5 Waves Pattern in Bearish Market

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01. Elliottwave Theory
Elliottwave Structure – Impulse with Extension

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01. Elliottwave Theory
Elliottwave Structure – Impulse with Extension

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01. Elliottwave Theory
Impulse with Extension – Rules and Fibonacci Relationships
▪ Extension is elongated impulse with exaggerated subdivision
▪ Extension happens in one of the impulse subwaves, either in wave 1, 3, or 5
▪ Extension frequently happens in the third wave
▪ Same rules of impulse apply to the extended impulse subwaves
▪ Same Fibonacci relationship between waves in Impulse also apply to the extended wave 3 subwaves

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01. Elliottwave Theory
Elliottwave Structure – Leading Diagonal

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01. Elliottwave Theory
Leading Diagonal Structure - Rules
▪ Special type of wave appearing in the first wave of an impulse
▪ It can also appear in wave A of a zigzag
▪ Characterized by overlapping wave 1 and 4 and the wedge shape
▪ Subdivision can be 5-3-5-3-5 or 3-3-3-3-3

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01. Elliottwave Theory
Elliottwave Structure – Ending Diagonal

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01. Elliottwave Theory
Ending Diagonal Structure - Rules
▪ Special type of wave mostly appearing in the fifth wave of an impulse
▪ It can also appear in wave C of a zigzag
▪ Characterized by overlapping wave 1 and 4 and the wedge shape
▪ Usually found in termination point of a larger pattern
▪ Each subwave is subdivided into three (3-3-3-3-3)

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01. Elliottwave Theory
Corrective Structures - Zigzag

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01. Elliottwave Theory
Zigzag Structure - Rules
▪ A corrective 3 waves labelled as ABC
▪ Subdivision of wave A and C are impulse / diagonal
▪ Wave B can be any corrective structure
▪ Wave C needs to have higher / lower momentum than wave A
▪ Zigzag is 5-3-5 structure

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01. Elliottwave Theory
Zigzag Structure - Fibonacci Relationships
▪ Wave B = 50%, 61.8%, 76.4% or 85.4% of wave A
▪ Wave C = 61.8%, 100%, 123.6% of wave A, or less than 1.618% of wave A
▪ If wave C > 161.8% of wave A, wave C becomes wave 3 and structure is expected to turn into an impulse

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01. Elliottwave Theory
Corrective Structure - Flats

Regular Flat Irregular / Expanded Flat Running Flat

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01. Elliottwave Theory
Corrective Structures – Flats - Regular Flat

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01. Elliottwave Theory
Regular FLAT Structure - Rules
▪ A corrective 3 waves labelled as ABC (3-3-5)
▪ Flat is 3-3-5 structure
▪ Subdivision of wave A and B are 3 waves
▪ Subdivision of wave C is impulse / diagonal
▪ Wave A and B can be any corrective structure
▪ Wave B does not retrace more than the beginning of wave A
▪ Wave C needs to end with RSI divergence

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01. Elliottwave Theory
Regular Flat Structure - Fibonacci Relationships
▪ Wave B = 50%, 61.8%, 76.4% or 85.4% of wave A
▪ Wave C = 61.8%, 100%, or 123.6% of wave AB
▪ Wave C sometimes can be 161.8% of wave AB or exceed 161.8% of wave AB

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01. Elliottwave Theory
Corrective Structures – Flats - Irregular (Expanded) Flat

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01. Elliottwave Theory
Irregular (Expanded) FLAT Structure - Rules
▪ A corrective 3 waves labelled as ABC (3-3-5)
▪ Flat is 3-3-5 structure
▪ Subdivision of wave A and B are 3 waves
▪ Subdivision of wave C is impulse / diagonal
▪ Wave A and B can be any corrective structure
▪ Wave B retraces more than the beginning of wave A
▪ Wave C needs to end with RSI divergence

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01. Elliottwave Theory
Irregular (Expanded) Flat Structure - Fibonacci Relationships
▪ Wave B = 123.6% of wave A
▪ Wave C = 123.6% or 161.8% of wave AB
▪ Wave C sometimes can exceed 161.8% of wave AB

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01. Elliottwave Theory
Corrective Structures – Flats - Running Flat

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01. Elliottwave Theory
Running FLAT Structure - Rules
▪ A corrective 3 waves labelled as ABC (3-3-5)
▪ Flat is 3-3-5 structure
▪ Subdivision of wave A and B are 3 waves
▪ Subdivision of wave C is impulse / diagonal
▪ Wave A and B can be any corrective structure
▪ Wave B retrace more than the beginning of wave A
▪ Wave C needs to end with RSI divergence
▪ Wave C does not pass end of wave A

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01. Elliottwave Theory
Running Flat Structure - Fibonacci Relationships
▪ Wave B = 123.6% of wave A
▪ Wave C = 61.8% or 100% of wave AB

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01. Elliottwave Theory
Corrective Structures – Triangles

Ascending Triangle Descending Triangle Symmetrical Triangle Expanding Triangle

Bullish
Market

Ascending Triangle Descending Triangle Symmetrical Triangle Expanding Triangle

Bearish
Market

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01. Elliottwave Theory
Corrective Structures – Triangle

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01. Elliottwave Theory
Triangle Structure - Rules
▪ Corrective structure labelled as ABCDE
▪ Usually happens in wave B, X or wave 4
▪ Can also happen in wave Y (of a double three structure) of wave Z (of a triple three structure)
▪ Subdivided into three (3-3-3-3-3)
▪ RSI also needs to support the triangle in every time frame
▪ Subdivision of ABCDE can be either ABC, WXY, or Flat

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01. Elliottwave Theory
Corrective Structures – Double Threes (WXY)

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01. Elliottwave Theory
Double Three (WXY) Structure - Rules
▪ A combination of two corrective structures labelled as WXY
▪ Wave W and Y subdivision can be abc, wxy, wxyz
▪ Wave X can be any corrective structure
▪ WXY is a 7, 15, or 23 swing structure

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01. Elliottwave Theory
Double Three (WXY) Structure - Fibonacci Relationships
▪ Wave X = 50%, 61.8%, 76.4% or 85.4% of wave W
▪ Wave Y = 61.8%, 100%, or 123.6% of wave W
▪ Wave Y can not pass 161.8% of wave W

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01. Elliottwave Theory
Corrective Structures– Double Threes

The most common structure!

▪ A combination of two corrective structures labelled
as WXY
▪ Wave W, X, and Y subdivision is a wxy
▪ WXY is a 7 swing structure

▪ Wave X = 50%, 61.8%, 76.4% or 85.4% of wave W

▪ Wave Y is commonly 100%, or 123.6% of wave W
▪ Wave Y can not pass 161.8% of wave W

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01. Elliottwave Theory
Elliottwave Structure – Triple Correction

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01. Elliottwave Theory
Triple Three Structure - Rules
▪ A combination of three corrective structures labelled as WXYZ
▪ Wave W, Y subdivision can be abc, wxy, or wxyz
▪ Wave X can be any corrective structure
▪ WXYZ is an 11 swing structure minimum

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01. Elliottwave Theory
Triple Three Structure - Fibonacci Relationships
▪ Wave X = 50%, 61.8%, 76.4% or 85.4% of wave W
▪ Wave Y = 61.8%, 100%, or 123.6% of wave W
▪ Wave Y can not pass 161.8% of wave W

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02 - Swings and Sequences
▪ Motive Sequence
▪ Corrective Sequence
▪ Swing Counts
▪ Identifying type of Sequence
▪ Bullish / Bearish Sequence
02. Swings and Sequences
Motive (Impulse Sequences)
▪ 5-9-13-17-21-25-29-33-37-41-45-49-53 and so on is a Motive (Impulse Sequence)
▪ Motive sequence starts with 5 and next number in the series is obtained by adding 4 so the sequence runs with increments of 4
▪ An Impulse (Motive wave) should always have at least the amount of swings shown above.

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02. Swings and Sequences
Impulse Waves / Diagonals
▪ Regular Impulses run in the sequence of 5-9-13-17-21-25 and so on with increments of 4.
▪ A Leading diagonal could run in Impulse sequence of 5-9-13-17-21-25 and so on or a corrective sequence of 3-7-11-15-19-23
and so on.
▪ An Ending diagonal structure runs only in corrective sequence of 3-7-11-15-19-23 and so on with increments of 4.
▪ Motive sequence should end with momentum (RSI) divergence.

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02. Swings and Sequences
Motive Sequence – Impulse
Figure 1 Figure 2

5 swings 17 swings

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02. Swings and Sequences
Motive Sequence - Leading Diagonal Ending Diagonal

11 swings
17 swings

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02. Swings and Sequences
Corrective Sequences
▪ 3-7-11-15-19-23-27-31-35-39-43-43 and so on is a Corrective Sequence
▪ Corrective sequence starts with 3 and next number in the series is obtained by adding 4 so the sequences runs with increments
of 4.
▪ Corrective sequence should always have at least the amount of swings shown above.
▪ Corrective sequence should end without momentum (RSI) divergence.
▪ Zigzags, Double Threes, Triple Threes, Triangles and Flat structures

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02. Swings and Sequences
Corrective Sequence – Zigzag

Figure 1 Figure 2

3 swings 11 swings

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02. Swings and Sequences
Corrective Sequence – Double Threes

Figure 1 Figure 2
3 3swings
swings 7 swings

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02. Swings and Sequences
Corrective Sequence – Triple Threes

Figure 1 Figure 2
Figure 1 is NOT 5 swing! 11 swings

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02. Swings and Sequences
Corrective Sequence – Triple Threes

Triple Three Impulse

▪ 11 swing sequence
▪ Corrective subdivision
▪ Wave Y = Wave W
▪ No RSI divergence in wave Z

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02. Swings and Sequences
Corrective Sequence – Triple Threes

Motive Corrective

▪ Waves that move in the same ▪ Waves that move against the trend of
direction as the trend of one larger one larger degree
degree
▪ Examples are zigzag, flat, triangles,
Definition ▪ An example is Impulse
double threes, triple threes
▪ Cycle is incomplete unless 5 waves is
part of a FLAT ▪ Cycle can be complete

▪ 5-9-13-17-21-25 - … in a sequence ▪ 3-7-11-15-19-23 - … in a sequence with

Sequence
with increments of 4 increments of 4

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02. Swings and Sequences
Identifying The Type of Sequence
▪ Sequences can be seen in both bullish and bearish markets and hence we have two types of sequences i.e. Bullish Sequence
and Bearish Sequence
▪ There is a misconception that a trend can only be in 5 waves (Impulsive sequence) and correction in 3 waves (Corrective
sequence)
▪ Every 5 wave move becomes a 3 wave move in a higher time frame (after 3 waves back and another 5 waves move to the
upside) so markets can trend in both Impulsive and Corrective Sequences
▪ Most market trend in corrective sequence except for Stock markets which mostly trend in Impulsive sequences

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02. Swings and Sequences
Bullish / Bearish and Incomplete Sequence
▪ A Bullish / Bearish sequence can be seen in both Impulsive and Corrective Structures.
▪ An incomplete sequence in an up trend is called a Bullish Sequence whereas an incomplete sequence in a downtrend is called
a Bearish sequence
▪ An Impulsive sequence runs as 5-9-13-17-21 and so on and number of swings depends on number of extended waves (nests)
in the impulse waves.
▪ Regular Impulse will have 5 swings, when wave 3 is extended, there would be 9 swings, when there are two nests, there would
be 13 swings and so on. Example: When one of the waves in an Impulse wave is extended, 7 swings would be an incomplete
sequence as we need 9 to complete the sequence.
▪ A Corrective Bullish sequence appears in an uptrend in the sequence of 3-7-11-15 and so on and sequence is incomplete until
the correct number of swings are not seen. Example: 5 swings in a corrective sequence is an incomplete sequence as we need
at least 7 to complete the sequence
▪ Swing number 5 in a corrective sequence typically ends in 61.8 – 76.4% of first 3 swings and should come with momentum
(RSI) divergence to be a valid incomplete sequence
▪ 5 swings sequence but without momentum (RSI) divergence could be early indication of a truncation and completion of
sequence.

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02. Swings and Sequences
Example: Corrective Bullish Sequence

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03 - Cycles & Correlations
▪ Relating Cycles across instruments / groups
▪ Types of Correlation
▪ 1st Degree Correlation
▪ 2nd Degree Correlation
▪ Relating Cycles using different degrees of correlation
03. Cycles & Correlations
Cycles
▪ When a cycle is intact, trend within that cycle stays the same
▪ When a cycle ends, then expect a correction of the cycle in 3, 7 or 11 swings or a trend change
▪ Cycle generally ends after 3 swings and equal legs (100% - 123.6% Fibonacci extension)
▪ A bullish cycle = a sequence of higher highs and higher lows
▪ A bearish cycle = a sequence of lower high and lower lows
▪ Different degree of cycles (Long-term, Medium-Term, Short-term)
▪ RSI and trend line channel can be used to determine a cycle

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03. Cycles & Correlations
Using RSI in Cycles
▪ Market runs in cycles and the cycles can be seen within the RSI
▪ A downtrend will be a sequence of lower lows and lowers highs, the trend should be down until the sequence happens
▪ An uptrend is a sequence of higher high and higher lows
▪ If the market is moving corrective then the sequence needs to be intact and the relationship should be intact
▪ A break of the sequence in a corrective move is a change of trend or the end of the internal cycle
▪ Wave 5 in a motive wave needs to provide momentum (RSI) divergence and needs to be seen in every time frame within the
RSI.
▪ Each subdivision of the motive waves need to provide momentum (RSI) divergence
▪ 3 waves move do not provide momentum (RSI) divergence and should not pass the beginning of ruling cycle
▪ Flats can pass beginning of the ruling cycles

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03. Cycles & Correlations
Trend and Cycle - WXY structure

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03. Cycles & Correlations
Trend and Cycle - WXY structure

7 Short Term cycles within the cycle 3 Medium Term cycles within the A bullish cycle from April 15 low to Aug 1
from April 15 low to Aug 1 high cycle from April 15 low to Aug 1 high high in the form of a double three WXY

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03. Cycles & Correlations
Trend and Cycle – Impulse structure

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03. Cycles & Correlations
Trend and Cycle – Impulse structure

17 Short Term cycles within the cycle 5 Medium Term cycles within the cycle A bullish cycle from April 15 low to Aug 1
from April 15 low to Aug 1 high from April 15 low to Aug 1 high high in the form of impulse

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03. Cycles & Correlations
Trend Line Channel & RSI
▪ A cycle is trading within an established trend channel in price & RSI
▪ When a trend channel breaks (either in price or RSI), it’s an early indication that the cycle may have ended and a new cycle
may begin

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03. Cycles & Correlations
Trend Line Channel & RSI

▪ 3 trend line channels from (y) low to w

high

▪ When the first blue trend channel is

broken to the downside in price and/or
RSI, it suggests that cycle from (y) low
may have ended

▪ When the second red trend channel is

broken to the upside in price and/or
RSI, it suggests cycle from ((W)) high
may have ended

▪ Both price and RSI make a higher high

and higher low sequence

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03. Cycles & Correlations
Market Correlation
▪ Market correlation is key and needs to be used in the right way or group
▪ Major groups in the Market
▪ USDX – EURUSD, GBPUSD, USDCAD, USDNOK, USDJPY, USDCHF, USDSEK, USDPLN.
▪ Commodities currencies – AUDUSD, NZDUSD, USDCAD
▪ Indexes – SPX, DAX, FTSE, S&P, ES_F, DJIA, Nasdaq, RUSSEL, AAPL, FTSE, DAX, IBEX, Eurostoxx50, NIKKEI, ASX,
Hangseng, TASI, NIFTY
▪ Yen group – USDJPY, GPBJPY,EURJPY,AUDJPD,CADJPY,NZDJPY,CHFJPY, TNX
▪ Commodities- Gold, silver, Copper, Oil, NATGAS

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03. Cycles & Correlations
Types of Correlation
▪ There are two types of correlations
▪ First dimension (When the groups agree in directions and swings)
▪ Second dimensions ( When the groups agree in swings but not in direction)

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03. Cycles & Correlations
Market Dynamics
▪ Yen Dynamic: USDJPY trades lower, Yen is strong, Yen pairs trade lower, Indices trade lower, and USDX gets sideways.
▪ Indices Dynamic: Indices trade higher, Yen pairs trade higher because of Indices, Yen gets weak, dollar is the one that gets
sideways and dollar pairs also get sideways.
▪ USDX Dynamic: Dollar lower / Higher/ Yen pairs goes with USDX pairs, Indices and Yen sideways.
▪ FIXED Dynamic: Higher Indexes, Higher Yen pairs, Higher USDX pairs, Lower USDX and Sideways to higher USDJPY.

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03. Cycles & Correlations
Relating Cycles using different degree of Correlation
▪ Always follow the clearest Elliott Wave Structure within the main groups and the relate to other instruments within that group.
▪ Clearest structure is either a 5 waves structure or a corrective structure in need of a 3-7-11-15-19-23 swings and so on.

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04 - Identifying and Trading
The Right Side
▪ How to Identify The Right Side
▪ Trading the Right Side
▪ Trading Impulse Sequence
▪ Trading Corrective Sequence
04. Identifying and Trading the Right Side
How to Identify the Right Side
▪ Swing Counts
▪ Correlation
▪ Cycles
▪ Fibonacci Extensions
▪ Relative Strength Index (RSI)

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04. Identifying and Trading the Right Side
Trading the Right Side
▪ Trading an Impulse Sequence
▪ Trading a Corrective Sequence

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Thank you for attending! We hope
you enjoyed the Webinar and it
helps you Trade the Right Side

Presented by: Eric Morera

• www.elliottwave-forecast.com

October 2018 | www.elliottwave-forecast.com

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