Elliott Wave Labelling and Rules – Numbers & Letters
Whenever students ask me “How can one best understand the entity of Elliott waves?” I always give the same answer: “Elliott waves must be considered, nothing else, but a technique employed to get an organized structure out of the world of market chaos.” As we know, the chaos theory applied to market’s chaotic movements is based on mathematics and physics methodologies dedicated to dynamic movements. They can only be visualized through the fractals, which in turn are controlled by non-linear equations. Benoit Mandelbrot (1924- 2010), a French-American mathematician, brilliantly coined the term “fractal” in 1974 and then exposed it in detail in the 1980s. The purpose of this article is not to treat the mathematical side of the fractals applied to financial markets, but to rather try and teach a practical approach to this topic, so that the trader can firmly and definitely grasp this concept. In order to identify an Elliott wave pattern, one surely needs a set of written rules that will enable us to reveal, at a glance, the structure and the corresponding wave identification.
We will see later on, in detail that the Elliott wave entity is composed of a cycle, which is composed of an impulsive pattern associated with a corrective pattern. Each of these patterns contain entities (waves and sub-waves) of different degrees of depth. The rules begin simply: