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It's All About 'Five and Threes'

Regardless of how new you may be to Elliott wave analysis, you know that it's relatively easy to follow professionally produced wave counts in market charts. But if you've ever tried to do your own wave counts while trading, you know how big a challenge it can be.

Yes, we've all heard that waves patterns are fractal – i.e., self-repeating on all time frames. We also know from Bob Prechter's "Elliott Wave Principle – Key To Market Behavior" textbook what an ideal pattern is supposed to look like. It's smaller wave patterns within larger ones, and it's all about "fives and threes":



OK, but what do you do when you see a wave pattern like the one below? It's a chart of the German DAX stock index, Europe's equivalent of the DJIA, as seen in the Nov. 27th issue of our European Short Term Update.



How would you label this chart? Well, I see what could be a wave 1... And then I think I see a wave 2... And that long stretch from July through November is probably wave 3? Except, this "wave 3" doesn't really show those "perfect" internal 1-2-3-4-5 subdivisions. In fact, it looks like one long straight shot up. Is it still a wave 3, then? Ah, that's where it gets tricky.

It could be a 3. Third waves are usually the longest and strongest; you can count this wave's internal structure, as "imperfect" as it may be… Plus, the whole ostensible 1-2-3 structure has the "right look," as Elliotticians often say. But is it a 1-2-3 for sure, with waves 4 and 5 to follow?

The answer is no. You can never know what the wave structure is for sure until it's complete – and not even then sometimes. Why? Well, the explanation veteran Elliotticians give is – it's not a perfect world. You won't always be able to count perfect 5s and 3s on a chart all the way down to milliseconds. Partly, it's due to the limitations of your data feed. But even if your data were perfect, some ambiguity would still be present.

Which means that sometimes, you'll be left guessing if what you see is a 3-wave or a 5-wave structure. But so what? Do you absolutely have to trade that pattern that very moment? Not unless you're a market maker. So why not just wait until the pattern becomes more clear?

The best traders often wait for months until all of their indicators line up – and only then do they pull the trigger. One famous trader I've read about puts it this way: "I only trade when I see money lying in the corner, and all I have to do is go and pick it up."

There are plenty of markets moving right now, large and small, up and down, daily, globally. Opportunities are everywhere – you just have to be patient enough to wait for the best entry and exit points. Which is easier said than done – but with wave analysis, it really is easier.

Click the Elliott Wave Analysis header link above to receive a free Elliott Wave Tutorial and learn more about the low risk high reward trade setups Elliott Wave Analysis provides.

Good day and good trading.

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