The previous lesson introduced the basic five-three wave structure. This lesson goes deeper — into the three rules that govern every valid impulse wave, the distinct personality of each wave within the structure, the three main types of corrective patterns, and the Fibonacci relationships that connect wave lengths. These details transform Elliott Wave from an interesting theory into a practical tool for anticipating where price is likely to go and where it is not.
The Three Wave Rules
Elliott Wave has three inviolable rules for impulse waves. If any of these is violated, the wave count is wrong — you are either counting the wrong waves or the pattern is something other than an impulse.
Rule 1: Wave 2 can NEVER retrace more than 100% of Wave 1. If Wave 1 ends at 1.0750 and started at 1.0600, Wave 2 can never go below 1.0600. If it does, what you thought was Wave 1 is not Wave 1. Rule 2: Wave 3 can NEVER be the shortest of Waves 1, 3, and 5. Wave 3 is almost always the longest. It can occasionally be shorter than Wave 1 or Wave 5 — but not both. If it appears shortest, recount. Rule 3: Wave 4 can NEVER enter the price territory of Wave 1. In an uptrend, Wave 4's low cannot go below Wave 1's high. If it does, what you counted as Wave 4 is likely Wave 2 of a different degree.
Wave Personality
Each wave within the impulse structure has a characteristic personality — a set of traits that help identify it in real markets.
Wave 1 typically begins against the prevailing trend sentiment. It is often modest in size and not widely recognised as a new trend. Most participants still believe the previous trend is intact.
Wave 2 often retraces deeply — 50% to 61.8% of Wave 1 is common. It creates the impression that the previous trend has resumed. Sentiment is still largely against the emerging new trend. This is where many traders are stopped out of early Wave 1 entries.
Wave 3 is the wave where the new trend becomes undeniable. Volume expands, momentum indicators peak, and breakouts of key resistance levels (in uptrends) occur. Most participants finally recognise the trend and join it during Wave 3 — often at a late and dangerous point.
Wave 4 is typically a less deep correction than Wave 2 — often 38.2% of Wave 3. It is frequently a sideways or complex correction rather than a sharp decline. It tends to be longer in time than Wave 2.
Wave 5 often shows momentum divergence — RSI and MACD fail to confirm the new price high. Volume can be lower than Wave 3. Sentiment is at its most bullish. This is typically the last opportunity to exit long positions before the ABC correction begins.
Types of Corrective Structures
The ABC correction is not always a simple three-wave structure. Elliott identified several corrective patterns that share the basic three-wave logic but differ in their internal structure.
Zigzag (5-3-5): The most common correction. Wave A is a five-wave impulse down. Wave B partially retraces (38-50% typical). Wave C is another five-wave impulse down. Sharp, clear corrective structure. Flat (3-3-5): Wave B returns near the start of Wave A. Wave A and B are three-wave structures. Wave C is a five-wave move — often ending near the same level as Wave A. Common as Wave 2 corrections. Triangle (3-3-3-3-3): Five waves labelled A-B-C-D-E. Each wave is a three-wave structure. Forms a contracting wedge pattern. Almost always appears as Wave 4. Breakout in Wave 5 direction.
Fibonacci Relationships in Waves
Elliott Wave and Fibonacci analysis are closely connected. Wave lengths frequently relate to each other through Fibonacci ratios — not always, but often enough that Fibonacci projections provide useful target estimates.
Wave 2 retracement of Wave 1: Typically 50% to 61.8%. Wave 3 extension of Wave 1: Typically 161.8% of Wave 1. Wave 4 retracement of Wave 3: Typically 38.2%. Wave 5 relationship to Wave 1: Often equal to Wave 1 in length. Sometimes 61.8% of Waves 1+3. Wave C relationship to Wave A: Most commonly 100% of Wave A (equal in length). Sometimes 61.8% or 161.8%.
Counting Waves in Practice
Wave counting in live markets is challenging because waves only become clear in hindsight. The most practical approach for developing traders is to use Elliott Wave for context and probability — not for precise entry timing. If you can identify that a five-wave impulse has completed and a Wave 2 correction is underway, you know to look for Wave 2 to end somewhere in the 50-61.8% Fibonacci retracement zone and then resume the trend direction in Wave 3.
Elliott Wave analysis is most valuable when combined with other tools. A Wave 2 correction that reaches the 61.8% Fibonacci level, forms a bullish pin bar, at a daily pivot point support, with RSI showing oversold conditions — this multi-tool confluence gives you a high-confidence Wave 3 entry with a well-defined stop below Wave 1's start.