# Scientific Wave Counting with the Template and Pattern Approach

Elliott Wave theory can be beneficial to predict the market movement if they are used correctly. Junior traders are often fear to use Elliott Wave because their complexity. From my experience, Elliott wave is not a rocket science, anyone can probably learn how to use the technique with some commitment. However, not all the book and educational materials will teach them in the scientific way.  If we are just looking at the three rules from the original Wave principle only, then there are definitely some rooms where subjective judgement can play in our wave counting. This makes starters to give up the Elliott Wave practice too quickly. Fortunately, there are some additional tools to overcome the subjectivity in our wave counting. First tool but the most important tool is definitely the three wave rules from the original Wave Principle. They can be used as the most important guideline for the wave counting. Below we describe the three rules:

Rule 1: Wave 2 can never retrace more than 100 percent of wave 1.

Rule 2: Wave 4 may never end in the price territory of wave 1.

Rule 3: Out of the three impulse waves (i.e. wave 1, 3 and 5), wave 3 can never the shortest.

Second tool is the Fibonacci ratio. As in the Harmonic pattern detection, Fibonacci ratio can play an important role in our wave counting because they describe the wavelength of each wave in regards to their neighbouring wave. For example, the following relationship is often found among the five wave of the impulse wave. Depending on which wave is extended among wave one, three and five, the Fibonacci ratios are different. Most of time, the extension of wave 3 is most frequently observed in the real world trading.

Figure 5-3: Fibonacci relationship of impulse wave structure.

Unless wave 1 is extended, wave 4 often divides five impulse waves into the Golden Section. If the wave 5 is not extended, the price range from the starting point of wave 1 to the ending point of wave 4 make up 61.8% of the overall height of the impulse wave. If wave 5 is extended, then the price range from the starting point of wave 1 to the ending point of wave 4 make up 38.2% of the overall height of the impulse wave. These two rules are rough guideline. Sometime, trader can observe some cases where these two rules are not hold true. Personally, I normally place the Fibonacci ratio relationship in Figure 5-3 before this Golden Section rule. However, the priority between these two rules might depend on the preference of traders.

Figure 5-4: Golden Section division rule with wave 4.

For the case of the three waves in the corrective wave, typical Fibonacci ratios are shown in Figure 5-5. The corrective wave is often retrace 61.8% or 32.8% against the size of previous impulse wave. In general, Elliott suggested that corrective wave 2 and wave 4 have the alternating relationship. If wave 2 is simple, then wave 4 is complex. Likewise, if wave 2 is complex, then wave 4 is simple. A “Simple” correction means only one wave structure whereas a “Complex” correction means three corrective wave structures. Furthermore, if wave 2 is sharp correction, then wave 4 can be sideways correction. Likewise, if wave 2 is sideways correction, then wave 4 can be sharp correction.

Figure 5-5: Fibonacci relationship for wave 1 and wave 2 (left) and for wave 3 and wave 4 (right).

To illustrate the wave counting process, consider the Peak Trough analysis in EURUSD H4 timeframe in Figure 5-6. We have selected H4 timeframe for demonstration purpose only. The Peak Trough analysis provide you some template which you can start your wave counting. In spite of the fact that Peak Trough analysis reveals the important peaks and troughs for your chart, we can see that it does not provide accurate wave counting. Remember that the template serve you to eliminate thousands of alternative possibility, but you still have to perfect your wave counting by yourself. Next step is to find either wave 123 structure or wave abc structure from our analysis. By Labelling the wave 1 and 2 first, we can find that wave 2 retraced back between 0.500 and 0.618 of wave 1. Since we know that next peak offer the multiple of price increase against wave 1, it is possible to guess next peak or the peak after the next peak might be wave 3 (Figure 5-7). As you can see, in the real world application, retracement of wave 2 can come near to the ideal Fibonacci ratio of 0.500 and 0.618. However, it will never be dead accurate most of time.

Figure 5-6: EURUSD H4 timeframe with the Peak Trough analysis.

Figure 5-7: Counting wave 1 and 2 on EURUSD H4 timeframe.

To find the wave 3 between the two peaks (Figure 5-7), we have to exam both peaks in this case. When we exam the first candidate peak, we can find that our wave 3 ends near the 1.618 level of wave 1 (Figure 5-8). Our wave 3 ended near the ideal ratio of 1.618 but they are never dead accurate over 1.618. Let us exam the second candidate peak. With second candidate peak, the peak is in fact closer to 2.618 level of wave 1 (Figure 5-9). We cannot determine wave 3 just by comparing the Fibonacci ratios of these two peaks. We can inspect wave 4 and wave 5 in conjunction with wave 3 to support our final decision. With first candidate peak, wave 4 landed very near 0.382 level of wave 3. However, wave 5 is slightly off from 1.000 level of wave 1. With our second candidate peak, wave 4 landed very near to 0.382 level of wave 3. However, wave 5 also landed very close to 1.000 level of Wave 1.

Figure 5-8: Locating wave 3 on first candidate peak on EURUSD H4 timeframe. Ideal level of wave 4 and wave 5 levels were calculated from candidate peak 1.

Figure 5-9: Locating wave 3 on second candidate peak on EURUSD H4 timeframe. Ideal level of wave 4 and wave 5 levels were calculated from candidate peak 2.

Figure 5-10: Final counting of five-impulse wave on EURUSD H4 timeframe.

Since the second candidate peak provide better evidence for wave 3, we can conclude this wave counting by labelling wave 3 on the second candidate peak. In addition, we can complete our labelling as shown in Figure 5-10. To sum up the process of wave counting, we list the six summary steps here for trader.

1. Apply the Peak Trough analysis.
2. Scan through different timeframe to look for key peaks and troughs and define your region of interest in your chart.
3. Look for potential candidate peaks and troughs for either wave 123 structure or wave abc structure from your region of interest in your chart.
4. Confirm wave 123 or wave abc from the evidences using Fibonacci ratio and three wave rules.
5. For wave 123 structure, confirm wave 45 from the evidences using Fibonacci ratio and three wave rules.
6. If your candidate peaks and troughs are not supported by the evidence, then reject the peaks and troughs. Move on to next candidate peak and trough and repeat the steps 4 and 5.

# Some More Tips about Scientific Wave Counting in Elliott Wave Theory

Scientific Wave Counting in Elliott Wave Theory involves a systematic and precise approach to identifying and labeling wave patterns in financial markets. This method emphasizes a structured framework that leverages mathematical and technical analysis principles to enhance the accuracy and reliability of wave counts.

## Principles of Scientific Wave Counting

### 1. Rule-Based Structure

Scientific Wave Counting strictly adheres to the core rules and guidelines established by Elliott Wave Theory:

• Wave 2 cannot retrace more than 100% of Wave 1.
• Wave 3 cannot be the shortest wave among Waves 1, 3, and 5.
• Wave 4 cannot enter the price territory of Wave 1.

### 2. Fibonacci Relationships

Fibonacci retracement and extension levels are fundamental to this method:

• Wave 2 typically retraces 38.2%, 50%, or 61.8% of Wave 1.
• Wave 3 often extends 161.8% of Wave 1.
• Wave 4 commonly retraces 23.6% or 38.2% of Wave 3.
• Wave 5 can extend 100%, 123.6%, or 161.8% of Wave 1.

### 3. Pattern Recognition

The method relies on recognizing common wave patterns:

• Impulse Waves (5-wave structure): Waves 1, 3, and 5 move in the direction of the trend, while Waves 2 and 4 are corrective.
• Corrective Waves (3-wave structure): Comprising Waves A, B, and C, with various formations such as zigzags, flats, and triangles.

### 4. Time and Price Symmetry

Symmetry in both time and price helps in identifying and validating wave counts:

• Time Proportions: Waves often exhibit proportional time relationships. For instance, Wave 2 and Wave 4 in an impulsive sequence might take similar amounts of time to develop.
• Price Proportions: Waves often adhere to proportional price relationships, conforming to Fibonacci levels.

## Steps in Scientific Wave Counting

### 1. Identifying the Starting Point

• Establish a Clear Baseline: Determine a significant high or low as the starting point of the wave count.

### 2. Labeling Waves

• Wave 1 Identification: Identify the initial move from the baseline. This is often accompanied by strong momentum and is typically uncorrected.
• Wave 2 Identification: Look for a retracement that adheres to Fibonacci levels, not exceeding the starting point of Wave 1.
• Wave 3 Identification: This wave should show strong momentum and be the longest or equal in length to Wave 1.
• Wave 4 Identification: Identify the corrective wave that should respect the territory of Wave 1.
• Wave 5 Identification: The final wave in the impulsive sequence, which may show divergence in momentum indicators.

### 3. Applying Fibonacci Tools

• Retracements and Extensions: Use Fibonacci retracement and extension tools to validate the wave count. For example, measure the length of Wave 1 and apply Fibonacci extensions to project potential targets for Wave 3 and Wave 5.

### 4. Confirming with Technical Indicators

• Momentum Indicators: Tools like RSI or MACD can help confirm wave patterns. For instance, a divergence in RSI during Wave 5 may indicate the end of an impulsive wave.
• Volume Analysis: An increase in volume during Waves 1 and 3 and a decrease in volume during corrective waves can provide confirmation.

• Continuous Monitoring: Continuously review the wave count as new price data emerges. Adjust wave labels if the price action deviates from expected wave behavior.
• Alternate Counts: Always consider alternate wave counts and be prepared to switch if the primary count becomes invalid.

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