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Deconstructing Motive Waves

Some general guidelines can be followed to identify a motive wave:

1. Wave 2 cannot be more than 100% of Wave 1.
2. Wave 3 cannot be the shortest wave of the three impulse waves (1, 3, and 5).
3. The price range of Waves 1 and 4 cannot overlap.

Elliott Wave Theory Applied to Markets

In real-time markets, it was observed that a motive wave could comprise three waves instead of five. In fact, most of the time, the market will see a motive wave that is composed of three waves. It is also possible that the market keeps moving in corrective waves. Therefore, three-wave trends are more common than five-wave trends.

Use of Fibonacci Ratios in Elliott Wave Theory

The Fibonacci summation series takes 0 as the first number. The next number is obtained by adding 1 to 0. Then, the series is derived by taking the previous two numbers and adding them to obtain the next number. The Fibonacci summation series looks like 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, to infinity. Fibonacci ratios are derived by dividing two Fibonacci numbers. The ratios are used to determine levels of support and resistance in the markets.

In Elliott Wave Theory, Fibonacci retracement is the use of Fibonacci ratios to determine where a correction ends so that the primary trend can begin again. Fibonacci retracements measure the depth of pullbacks in a trend. For example, Wave 2 can be 50% of the length of Wave 1.

Another widely used tool is Fibonacci extensions. Fibonacci extensions are used to determine the turning points in a primary trend. In a bull market, they indicate where a motive wave can go before a correction. In a bear market, they can be used to determine support levels. Fibonacci extensions are used to measure stock price levels at which profits can be realized.