3 Cardinal Rules of Elliott Wave Theory

As you may imagine, the ability to correctly identify waves is very important to employing Elliott Wave Theory in trading.

You'll be able to determine which side of the market to trade on, long or short, if you have the appropriate eye for detecting what wave the market is in.

When it comes to wave labeling, there are THREE cardinal “cannot-be-broken” laws.

So, before you start using Elliott Wave Theory in your trading, you should familiarize yourself with the following guidelines.

Failure to accurately categorize waves could lead to a devastating consequences on your balance.

Elliott Wave Theory's Three Cardinal Rules

Wave 3 can never be the shortest impulse wave, according to Rule #1.

Wave 2 can never reach beyond the beginning of Wave 1 (Rule #2).

Wave 4 can never cross a similar scale value like Wave 1 (Rule #3).

Trading Rules for Elliott Waves

Then there are recommendations to help you label waves correctly.

These principles, unlike the three cardinal rules, can be broken. They are as follows:

Wave 5 may or may not progress past the end of wave 3. This is called truncation.

Wave 5 often “breaks through” or “goes past” the trend line formed from Wave 3 and parallel to a trend line linking the beginnings of Waves 3 and 5.

Wave 3 is known for being very long, sharp, and stretched.

Fibonacci retracement levels are used by waves 2 and 4.