Elliott Wave Theory — A Beginner's Guide

Price doesn't move in a straight line. It moves in five waves with the trend (numbered 1 through 5), followed by three waves against the trend (labeled A, B, C). That alternation — impulse, then correction — repeats at every scale, from multi-year charts down to a single afternoon. That repetition at every scale is the fractal nature of the theory, and it's the whole reason the same rules and the same trim/re-add logic keep showing up no matter what timeframe you're looking at.

A worked example. Say a stock starts at $50. Wave 1 rallies to $85. Wave 2 pulls back to $70 — still well above the $50 start, so Rule 1 holds. Wave 3 extends hard to $155, the biggest single leg of the move, satisfying Rule 2. Wave 4 cools off to $115 — safely above Wave 1's $85 high, so Rule 3 holds too. Wave 5 pushes to a marginal new high at $170, and the ABC correction begins: a sharp drop to $120 (A), a fake-out bounce to $145 (B, still below $170), and a final leg down to $95 (C) that undercuts Wave A's low.

Zoom into Wave 3 in Fig. 1 above, and you'd find its own 1-2-3-4-5 hiding inside it. Zoom into Wave C, and you'd find its own A-B-C. This nesting is why Elliott Wave charts are usually labeled with a mix of circled numbers, numbers in parentheses, and plain numbers — each set marks a different "degree," or size, of wave.

The formal degree names, largest to smallest, run: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, Sub-Minuette. You'll rarely need all of them — but recognizing that a chart mixes degrees is what lets you read one at a glance.

These aren't guidelines — if any one of them breaks, your wave count is wrong, full stop:

The Wave 4 rule holds for a standard impulse — but there's an important exception: Leading Diagonals (which can appear in the Wave 1 or A position) and Ending Diagonals (which can appear in the Wave 5 or C position) are wedge-shaped patterns where overlap between Wave 4 and Wave 1 isn't just allowed, it's expected. If a chart looks like a converging wedge rather than a clean impulse, don't invalidate it just because Wave 4 dips into Wave 1's territory — check whether you're actually looking at a diagonal first.

One more pattern worth knowing, though it's not a hard rule like the three above: in a regular flat or zigzag, Wave B typically stays below the high made by Wave 5. But this isn't universal — in an expanded flat, Wave B can push past the Wave 5 high and make a new high of its own before Wave C turns down hard. Treat it as a common tendency to watch for, not something that invalidates your count if it doesn't hold.

• 1
  The First MoveOften disbelieved — it can look like just another bounce inside a bigger downtrend.
• 2
  The Deep PullbackShakes out early longs. This is the classic Buy #1 / starter-position zone from the DCA guide.→ DCA Guide: Buy #1 — Starter Position
• 3
  The Powerful WaveUsually the longest and strongest — most of the trend's profit is made here. It's also where TVT trims 20–30% near the 1.618 Fib.→ Trim Guide: Wave 3 Trim Zone
• 4
  The ResetSideways or shallow, without breaking the trend. This is the re-add zone near the 0.382 Fib.→ Trim Guide: Wave 4 Re-Add
• 5
  The Final PushRetail participation and bullish headlines peak here, often alongside momentum divergence. This is where TVT trims aggressively.→ Trim Guide: Wave 5 Aggressive Trim

• A
  The SelloffSharp, often mistaken for a full reversal. Volume often picks up as weak hands get shaken out.
• B
  The Fake-OutA counter-rally that typically retraces 38–79% of Wave A — convincing enough to trap undisciplined buyers.
• C
  The CompletionUsually close to a 1:1 length with Wave A, often making a lower low before the next impulse begins.

This guide covers the market structure. The Trim & Re-Entry Guide and the Buying & DCA Guide cover exactly what TVT does at each point in that structure — they're meant to be read together.