Market Waves Through Elliott Wave Theory | How to Reduce Counting Confusion Part 2

This article is a continuation of Part 1.
If you haven't read it yet, please start from Part 1 below.

Click here for Part 1
https://note.com/wizarding/n/n241b1d32c885

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I understand the desire to find Wave 3. But don't label everything as Wave 3.

When you study Elliott Wave theory, you usually become interested in Wave 3.

Wave 3 over Wave 1.

Wave 3 over Wave 5.

Everyone loves Wave 3.

This is because Wave 3 is often described as a phase that attracts a lot of attention among impulsive waves.

Therefore, when you see a wave that has extended significantly on a chart, you think:

"Is this Wave 3?"

And when it extends a little more,

"It must be Wave 3."

And when it extends even further,

"It's definitely Wave 3."

Yes, it's full of third sons.

The chart's family tree collapses.

Of course, there is nothing wrong with looking for Wave 3 itself.

If you are counting it as a normal impulse, Waves 1, 3, and 5 are the waves in the direction of the trend. Among them, there is a rule that Wave 3 cannot be the shortest wave among Waves 1, 3, and 5.

Because of this rule, Wave 3 is easily seen as a phase where market participants can easily recognize the trend.

However, a common mistake here is

to think that "a large, extended wave equals wave 3."

This is a bit imprecise.

Wave 3 is not wave 3 just because it extended.

There is a candidate for wave 1, the subsequent candidate for wave 2 does not clearly break the starting point of wave 1, and from there, it moves in the direction of the impulse again, appearing to exceed the end point of wave 1.

Within that flow, you view it as a candidate for wave 3.

This is the correct order.

If you identify wave 3 based solely on momentum, you are just labeling extended waves after the fact rather than actually analyzing the chart.

I myself used to just label the most energetic wave as wave 3 back in the day.

Acting like some kind of wave 3 certification expert.

Saying, "This is wave 3."

No, where is the evidence?

Looking back, I was just putting numbers on energetic waves to feel secure.

If wave 2 is suspicious, the analysis of wave 3 becomes suspicious too.

Before looking at wave 3, look at wave 2.

Wave 2 is the retracement against wave 1.

The downward retracement after a candidate for an upward wave 1 appears, or the upward retracement after a candidate for a downward wave 1 appears.

What you want to check here is whether wave 2 has clearly broken the starting point of wave 1.

If you are looking at an upward trend, the moment wave 2 clearly breaks below the starting point of wave 1, it is a situation where you should start to doubt, "Can I really view that as wave 2?"

This is a bit imprecise.

If you count it as a normal impulse, it becomes quite suspicious.

It is the opposite for a downward direction.

However, I would like to distinguish between general rules and how to handle them when actually looking at FX charts.

As a principle, if it clearly exceeds the starting point of wave 1, you should doubt the count.

On top of that, I personally check whether it is a wick or a body, and which timeframe I am looking at.

Just because it broke through slightly with a wick, it doesn't mean it's immediately over.

It is not a matter of viewing it so mechanically.

That said, at the very least, if wave 2 has significantly broken the starting point of wave 1,

thinking things like "No, it can still go," "This is a deep wave 2," or "Actually, this is a shakeout"

is something to be a little careful about once you start viewing it conveniently.

This is where your own desires get mixed in.

You want to see wave 3.

So you want to downplay the suspicious nature of wave 2.

This happens.

You think you are counting, but you are just assigning numbers to your own desires.

Moreover, the person doing it is quite serious.

But what you really want to see is not whether you can stick to the count.

It is whether you can still use that count for live analysis.

That is the point.

If the count is becoming suspicious, lower the tone of your live analysis for the time being.

Instead of saying, "We've entered wave 3,"

try saying, "The conditions are starting to look a bit questionable for this to be a wave 3 candidate."

That level of caution is just fine.

If you provide commentary based solely on excitement, you'll usually have to issue a correction later.

Fibonacci is a note of potential targets, not a destination.

In Elliott Wave theory, Fibonacci is sometimes used in conjunction.

How much has wave 2 retraced? Where are the potential targets for wave 3 to extend to? Where do the potential endpoints for wave 5 overlap?

These are the things you use it to confirm.

However, even here, people start looking at it in a way that suits their convenience.

It reacted at 38.2%. No, it also reacted at 50%. 61.8% is close, too. If I look at 78.6%, something seems to fit.

Yes, it's full of potential targets.

Fibonacci is convenient.

But because it is convenient, it is easy to apply after the fact.

That is why it is better not to jump to conclusions about reactions based solely on Fibonacci numbers.

If you are going to look at it, check if it overlaps with other factors.

Past highs and lows. Range upper and lower limits. Swing lows and swing highs. Key levels on higher timeframes. How the candlesticks are left behind. How the price reacts after reaching that point.

Look at these things together.

Fibonacci is not a destination.

It is a note of potential targets.

Instead of saying, "It should go this far,"

Think of it as, 'There is a candidate around here that might be recognized as a wave break.'

Just keep it at that level.

Even just doing this puts a bit of a brake on the urge to see a Wave 3.

Brakes are important.

When you're watching the market, you tend to want to just step on the gas.

I understand the desire to find a Wave 3.

I understand, but if you label every extended wave as a Wave 3, the chart becomes too convenient for your own narrative.

Before looking for a Wave 3, doubt the Wave 1.
Doubt the Wave 2.
Look at the position on the higher timeframe.

After that, if it still looks like a Wave 3 candidate, then you can raise your voice a little in the commentary booth.

That much is enough.

You don't need to start screaming right away.

Because the match is still in progress.

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That's it for Part 2.

Please look forward to the continuation in Part 3.

Technical Analyst / Investment Diagnostician® / FP Technician / FX & Stock Trader / EA Developer
daice