As you might expect, the key to successfully employing Elliott Wave Theory in trading is the ability to identify waves.
You will be able to determine which side of the market to trade on, long or short, by acquiring the appropriate eye in detecting what wave the market is in.
In labeling waves, there are THREE basic “never-broken” laws.
So, before applying the Elliott Wave Theory to your trading, you should be aware of the following rules.
Failure to accurately categorize waves might be detrimental to your account.
3 Cardinal Rules of the Elliott Wave Theory
Rule Number #1: Wave 3 can NEVER be the shortest impulse wave
Rule Number #2: Wave 2 can NEVER go beyond the start of Wave 1
Rule Number #3: Wave 4 can NEVER cross in the same price area as Wave 1
Elliott Waves Trading Guidelines
Then there are recommendations to help you label waves appropriately.
These principles, unlike the three cardinal rules, can be broken. They are as follows:
Wave 5 does not always extend past the end of Wave 3. This is known as truncation.
Wave 5 frequently exceeds or “breaks through” the trend line created off Wave 3 parallel to a trend line linking the beginnings of Waves 3 and 5.
Wave 3 is typically quite long, sharp, and prolonged.
Waves 2 and 4 commonly retrace to Fibonacci levels.
Next Lesson: How to Trade Forex Using Elliott Waves