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Elliott Wave
Advanced Trading
Guide

Authored by Jamie Saettele

Technical Currency Strategist
July 2008

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without
limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not
indicative of future results.
Elliott Wave Advanced Trading Guide DailyFX Research Team

In the 1930s, Ralph Nelson Elliott discovered that freely traded markets are patterned. More specifically, he discovered that moves in
the direction of the larger trend unfold in 5 waves and that moves against the larger trend (corrections) unfold in 3 waves.

Elliott studied multiple time frames, ranging from yearly to half-hourly, of the Dow Jones Industrial and Dow Jones Transport
(considered more important at the time) indexes. He found the same patterns, regardless of time frame. This concept, that a market
exhibits a similar structure at all degrees of trend (much like tree, which is made up of smaller versions of itself), would later come to be
known as fractal (see Figure 1).

Although initially concentrated on stock markets, Elliott expanded his study to various commodities markets and found the same
patterns! He wondered why markets that are supposedly driven by different outside events would exhibit the same patterns. The
answer is that market trends are not a product of outside forces, but are instead a product of human psychology, which follows the
wave principle.

FIGURE 1: The basic 5-3 pattern is evident at all degrees of trend

This advanced guide expands on the basic Elliott Wave guide by presenting in more detail the patterns that Elliott discovered.

Motive Waves

Movements in the direction of the trend of one larger degree trend unfold in 5 waves are referred to as motive waves. Notice in Figure
1 that waves 1, 3, 5, A, and C each divide into 5 waves. These waves are with the trend of one larger degree, which divide into 5
waves. On the other hand, waves 2, 4, and B divide into 3 waves because these waves are against the trend of one larger degree.
All motive waves obey 2 rules.

1.) Wave 2 never retraces more than 100% of wave

2.) Wave 3 is never the shortest wave

Impulse

Impulse waves are the most common type of motive wave. In an impulse, wave 4 does not enter into the price territory of wave 1
(although in FX, with the high degree of leverage, you will see overlapping on intraday charts; but rarely).

Extensions

In an impulse, one of waves 1, 3, or 5 is extended. Wave 1 is rarely extended. Wave 3 is often the extended wave.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without
limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not
indicative of future results.
Elliott Wave Advanced Trading Guide DailyFX Research Team

Figure 2: One of waves 1, 3, or 5 is always extended

Diagonal

Diagonals are known to traditional chartists as wedges. A diagonal is most common in the 5th wave position that follows an especially
strong 3rd wave. In such instances, the pattern is referred to as en ending diagonal. In an ending diagonal, each wave (1,2,3,4,5)
consists of 3 waves and waves 2 and 4 can overlap.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without
limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not
indicative of future results.
Elliott Wave Advanced Trading Guide DailyFX Research Team

Figure 3: An ending diagonal in the 5th wave position following an especially strong 3rd wave

Reversals from ending diagonals are sharp and the entire diagonal is usually fully retraced. The position is initiated near the line that
connects waves i and iii (this estimates the end of wave v). The initial stop is not clearly defined since the position is initiated near the
5th wave extreme.

Corrective Waves

Triangles

Triangles are common as 4th waves, B waves (and X waves…see combinations). The pattern consists of 5 overlapping (and usually
contracting) waves labeled A, B, C, D, and E. Each one of these waves is composed of 3 waves.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without
limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not
indicative of future results.
Elliott Wave Advanced Trading Guide DailyFX Research Team

Figure 4: Detailed structure of a triangle (left), a triangle as a B wave (middle), and a triangle as a 4th wave (right)
At the beginning of the triangle, the trader does not know that the pattern unfolding is actually a triangle. Towards the end of the
triangle, the pattern is quite clear and the trader can position for the wave that will succeed the triangle (5th wave or C wave). Positions
are initiated near the end of wave E and a stop is placed below wave A.

Zig-zags

Zig-zags are common as 2nd waves and B waves. The pattern consists of 3 waves and is labeled A-B-C. Waves A and C are
composed of 5 waves (impulses) and wave B is composed of 3 waves (correction).

Figure 5: A bull market zigzag (bull market because the zigzag is down, against the larger trend)

Flats

Flats occur commonly as 4th waves and B waves. The pattern is labeled the same as a zigzag, A-B-C, but the compositions of the
subwaves differ from that of a zigzag. While a zigzag’s divisions are 5-3-5, a flat’s divisions are 3-3-5. Wave A is just in 3 waves.
Wave A is weak (only 3 waves), therefore wave B terminates near or beyond the origin of wave A. Wave C will typically end just
beyond the end of wave A. There are 3 kinds of flats. Regular, expanded, and running. Expanded flats are actually more common
than expanded flats and running flats are rare.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without
limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not
indicative of future results.
Elliott Wave Advanced Trading Guide DailyFX Research Team

Figure 6: A regular flat (left), an expanded flat (middle), and a running flat (right)

Combinations (complex corrections)

Prolonged sideways / corrective action is the result of a combination, also termed a complex correction. A complex correction is 2 or 3
(but no more than 3) corrective patterns connected by an X wave(s). The first and third patterns are labeled W and Y. In a triple
combination, there is a fifth pattern that is labeled Z.

Figure 7: A double zigzag (2 zigzags connected by a 3 wave movement known as an X wave. A triple combination would have
another X wave connecting waves Y and Z.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without
limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not
indicative of future results.
Elliott Wave Advanced Trading Guide DailyFX Research Team

Elliott in Action

Elliott wave practitioners will often say that “it’s all about 5’s and 3’s”. 5 waves in one direction indicate that the larger degree trend is in
that direction. Knowing the larger degree trend enables the trader to position for the big move. Can you count the waves from the
November 2007 top in the GBPUSD? What wave is unfolding now?

Go to the next page to see the labels.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without
limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not
indicative of future results.
Elliott Wave Advanced Trading Guide DailyFX Research Team

The decline from 2.1160 unfolded in 5 waves, therefore the trend at the next larger degree is down. This means that at least one more
5 wave decline will occur before a bottom is in place. Following the 5 wave decline, the GBPUSD has traded sideways in a corrective
pattern in what will be either a flat or triangle. Either way, there is still upside potential. In the case of a flat, the GBPUSD will exceed
2.04 before reversing lower and dropping below 1.9337 (wave 5 price extreme). Just using the wave principle, we know that the
GBPUSD is likely to rally a bit more before embarking on a decline that does not end until below 1.9337.

Well Worth the Time

There is much more to wave analysis that what has been presented here. Anything that is worth learning takes time. The wave
principle is no different. Successful application requires a good deal of practice. This introduction should whet your appetite.
Interested? If so, visit our Elliott Wave Forum and read the Daily Technicals and Crosses, published everyday DailyFX.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials. FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without
limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not
indicative of future results.