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All of us Elliott wave practitioners have or will learn different wave formations, Fibonacci retracement and many advance indicators in our forecasting journey, but a lot of us usually miss the definition of a wave itself. I can explain why a price move and show what a wave look like to others, but it is not easy for me to explain “so, what is a wave ?”. This is what motivates me to start the next theory section with a basic question.

To explain what a wave is, the first thing I thought about is what makes a wave. A wave is formed by a combination of many trading actions in a period of time (can be 5 minutes to a month). According to Glenn Neely in his book “Mastering Elliott Wave”, at its simplest form, a wave is a price movement of the market starting from a change in price direction to the next change in price direction occurs. Glenn calls this a monowave. Bob Prechter wrote in his “Elliott Wave Principle” book that a wave is any one of the patterns that naturally occur, as described in the rest of his book. To elaborate, Bob wrote that market’s progression unfolds in waves, which are patterns of directional movement.

In my own words: a wave in stock market is a one directional price movement within a period of time, which is caused by a combination of emotion-driven trading action.

I find that my dictionary definition does not really help me in my forecasting. In fact, Glenn Neely’s definition is by far the most descriptive. Here is what he meant by a wave:

In graphical sense, a wave ends when the price moves to a different direction, however, it would have to be confirmed by another movement in the different direction that exceeds previous extreme.

If there is a slight change in the slope (as long as it’s not going to the other direction), it would still be called a wave. Glenn goes more in depth in his book to explain what is the best way to plot the data so that the wave pattern is clearly visible. Since Elliott wave count requires a full view of market activities, one must consider the whole price movement in the trading period during the wave count i.e. do not use only the high, the low or the close data only. As you can see in my market analysis section, I have been using the bar chart as my chart view. By using the bar chart, I am able to see the high and low of the day as well as the open and close data, giving me a good summary of what happen during the day. I also found that if my trading horizon is daily for example, I should look at the price movement in smaller time frame (60 min let say). So the time frame of your chart depends on how far you want your forecast to be. The longer it is, the longer you may have to wait for the pattern to show up.

As you plot your data, you will find that there are many smaller monowaves in terms of price movement and time spent. These are still monowaves. They are just probably in different degrees, which is what I usually call wave subdivision in my analysis. When you see all the monowaves in your daily chart, you will see that in general, the waves move in one big direction, which is the general direction of the market at that period of time. All monowaves have to be categorized into either a 5-wave group (impulse) or a 3-wave group (corrective) according to the rules that Elliott stated in his work (see Introduction).

RH