Crypto Trading Strategy: Elliott Wave Theory Triangle Analysis

Q: What is Elliot Wave Theory?

Elliott Wave Principle, also known as Elliott Wave Theory, is a type of technical analysis. It is used by financial traders to analyze financial market cycles. It forecasts market trends by looking for price patterns to identify extremes in investor psychology and price levels, such as highs and lows.

Q: What time period is best for Elliot Wave?

Any time frame should be appropriate for Elliott wave patterns. The time frame that gives you the most comfort is the one you should use. You can use one-minute, five-minute, or one-hour candles if you're a day trader.

Q: What are the disadvantages of Elliot Wave Theory?

It can be challenging to identify the start or end of a wave in the five-wave cycle at times, which is a drawback of the Elliott Wave Theory. One can become more adept at spotting these patterns with a great deal of practice.

Market movements bring us infinite opportunities every day. If you want to catch the majority of trading opportunities, you need a powerful strategy able to adapt itself during different price movements of different cryptocurrency trading pairs. From BeInCrypto, we’ve learned the principles of Elliott Wave Theory, an extensive technical analysis study based on impulses and corrective stages on the price movements. This strong and moldable technique opens the doors to an endless amount of effective strategies, applicable to any market. This time, we’ll learn a strategy based on corrective stages combined with triangle charting patterns to approach the next impulse. In This Article: Elliott Wave Theory Principle Elliott Wave Theory Corrective Stages Structure How Triangle Chart Patterns are Related to Corrective Stages Crypto Trading Strategy Elliott Wave Theory Principle First of all, we have to be clear with the base and rules of Elliott Wave Theory: Elliott’s waves say that market movement is divided into two fundamental stages: impulsive stage and corrective stage. The impulsive stage consists of 5 waves named by numbers and the corrective stage in 3 waves named by letters. For the impulsive stage: waves 1, 3 and 5 go in favour of trend (bullish or bearish), these are micro-impulsive. On the other side, waves 2 and 4 are micro-corrective, because their direction is against the trend. For corrective stage: waves A and C are micro-impulsive and B is micro-corrective. Each wave has microwaves in its own structure. That’s why waves 1, 3, 5, A and B are impulsive and have in its formation 5 microwaves. In the same way, waves 2, 4 and B have a three-wave structure. Wave 2 never retraces more than 100% of wave 1. Wave 3 is often the longest and never the shortest among the three impulsive waves of impulsive stage (1, 3 and 5). Wave 4 does not retrace further than the endpoint of wave 1. Elliott Wave Theory Corrective Stages Structure We’ve learned that the second and fourth wave are corrective, and its basic structure has 3 waves (named by letters A, B and C). But, that’s not a definitive and rigorous structure; Elliott’s theory also says that corrective waves may appear with different evolutive configurations. Starting with the structure of the microwave (with A-B-C pattern), it could show on a 3-3-5 or 5-3-5 microstructure: EWT corrective 5-3-5 and 3-3-5 corrective structures example How Triangle Chart Patterns are Related to Corrective Stages In both structures, wave C can be formed in a triangular formation, specifically in a descending wedge for a bullish scene and rising wedge for a bearish scene. If that happens, the five-wave rules can be ignored to allow this formation. This triangular pattern is called “Ending Diagonal”. Ending diagonal example As we can see, the “Ending Diagonal” formation contains the word “ending” because the pattern announces the end of the correction and the beginning of a new impulsive movement. This is a special feature of all Elliott’s triangle. This is an effective way of catching an important price movement. However, the most interesting corrective pattern occurs when a triangle appears forming an entire fourth wave structure. This peculiarity is exclusive to fourth waves and its divided into a '5 wave pattern' (named by letters A-B-C-D-E). In the same way, a triangle’s breakout will mean the end of the fourth wave and beginning of the fifth wave. Compared with 'ending diagonal pattern', this new A-B-C-D-E triangle occurs more often. Elliott Wave Theory entire fourth wave with triangle structure example All patterns explained here work on a bearish scene. Let's see a fourth wave A-B-D-C-E bearish pattern with a real chart: Fourth wave with triangle structure on bearish chart example Before continuing, we can read the following summary of Elliott corrective waves and triangle pattern relationship: The 'Ending Diagonal wave' occurs on 'C' microwave inside all corrective waves. These triangle waves are named by numbers 1-2-3-4-5. A complete wave triangle corrective pattern occurs only on the fourth wave, and includes all wave formations. We have a wave 4 with A-B-C-D-E structure. Triangle breakouts can announce the end of the corrective stage and beginning of the next impulse (wave 3 or 5). Crypto trading strategy based on Elliott Wave Theory with Corrective Triangle study 1. First of all, we need to identify the current trend to help decide the direction of our trade, bullish or bearish, long or short. Bullish trend example 2. The current example shows us a bullish trend, we’ll take a long trade. Now, we need to wait for a clear corrective stage to identify A-B-C with Ending Diagonal structure or A-B-C-D-E with a complete corrective triangle structure. Identifying the Ending Diagonal structure on chart 3. Now, our mission is being patient to wait for the pattern breakout. This breakout needs to be clear and strong, preferably showing a complete candle with small or null shadow. Ending Diagonal Breakout 4. It’s time to take the long trade. We’ll enter with a long position, the stop loss will be behind the minimum of the fourth wave, and the target on the maximum point of the third wave. Long trade on Ending Diagonal breakout setup 5. Enjoy the trade and wait for the outcome: Trade outcome example for Ending Diagonal Strategy on C wave What if we got a complete fourth wave triangle setup? The previous three steps are the same in this case. For trading structure, the change happens on 'take profit' conditions. To take profit, we’ll take the Fibonacci extension tool with a length from the beginning of the first wave to the end of third, then we have to adjust its position to the end of the fourth wave. Rising Wedge trade on fourth wave example As we can see on the drawing above, we get a 'rising wedge' complete triangle on the fourth wave with A-B-C-D-E pattern, in a bearish scenario. Elliott wave triangle corrective patterns do not happen very often, but if we can see any of these, it has a high potential to be a winning trade. Further Reading: Want to know more? Join our Telegram Group and get trading signals, a free trading course and daily communication with crypto fans! Sign up to our newsletter for daily technical analysis, educational content and the top news stories. BeInCrypto Newsletter Now Subscribe to our daily curated newsletter to receive the latest exclusive BeInCrypto coverage delivered to your inbox. Submit Frequently Asked Questions