LT Elliott Waves

LT Elliott Waves Indicator:

According to Elliott Wave Theory, price moves in 5 waves in the direction of the major trend and moves in 3 waves (ABC) when it moves against the major trend. The key purpose and value of elliott wave theory (EWT) is to provide context for chart analysis. According to the book The Elliott Wave Principle by Frost & Prechter: “This context provides both a basis for disciplined thinking and a perspective on the market's general position and outlook.” The benefit of having context is that one can identify and anticipate changes in direction.

In Elliott Wave theory, waves 1, 3, 5 and C are impulse waves (a five wave pattern that makes progress) whereas waves 2, 4, A and B are corrective waves (a three wave pattern – or combination of three waves - that moves against the direction of the larger trend). Although wave A can also be formed of 5 waves, it is commonly formed of 3 waves. Here is a brief summary of the waves:

Wave 3 tends to be the strongest and most dynamic wave – it is usually (but not always) the longest wave but it is never the shortest. Wave 4 is a corrective wave that is typically composed of 3 smaller waves (ABC) and is notorious for being messy and unpredictable in nature. Wave 5 is the final wave before a significant correction or reversal in trend and is often accompanied by divergences (e.g. negative divergences in an uptrend) and exhaustions in momentum. It is also possible for a wave 5 to form after a “blow-off top” pattern. Wave 2 is composed of 3 smaller waves (ABC) and is a retracement of wave 1 – the retracement can be shallow to moderate (23.6% to 38.2%) or deep (50%, 61.8% to 78.6%). Wave 1 is the first wave of a trend and is composed of 5 smaller waves – it usually occurs after divergences (in the prior move) and extremes in both sentiment and momentum. For example, the wave 1 of an uptrend can often begin after capitulation in the price (after a major decline), extremely pessimistic sentiment, extremely oversold momentum readings, positive divergences and sometimes accompanied by a volume breadth thrust. Waves A and C are often equal in measure. Wave A can be formed of either 5 waves or 3 waves - but more commonly it is composed of 3 waves. Wave B is always corrective and composed of 3 smaller waves. Wave C is a five wave impulse pattern.

The Elliott Wave indicator (and addendum) seeks to simplify elliott wave theory (EWT) in that its main purpose is to identify the potential major trends and corrections. The indicator takes a more simple and direct approach to EWT in that it focuses more on trying to identify whether price is trending or not and if so, the probable wave pattern. It does this by mainly using the structure of the price chart and sometimes other factors such as divergences, momentum and the relationship of price to its key averages. The indicator then takes its best guess at whether price is in a trending environment, and if so, which wave it is probably forming. The wave count can therefore depend on the chart timeframe chosen. For example, what may appear as a major downtrend on a lower timeframe chart may potentially be a corrective drop on a much higher timeframe, due to the different price structure of the charts. To keep things simple and to avoid complexity, the indicator does not display the minor sub-waves within the major waves (probably with the exception of wave 4).

The main feature and benefit of the Elliott Wave indicator is that it can remove subjectivity in chart and wave analysis. It also for flexibility in that it allows the chartist to alter the wave count and the position of the wave counts if they choose to do so (within the parameters and rules set by the indicator). As with all of technical analysis, the wave counts shown by the elliott wave indicator are NOT certain – they are only a possibility or a probability. So the risk always exists of an alternative wave count. It is for the chartist to determine the probable wave counts and limit or control the risks based on their knowledge of technical analysis and risk management.

The settings of the Elliott Wave indicator are fairly self-explanatory but here is a brief summary:

By default the indicator is set to a strict setting (“Alt 8”) in that it waits for divergences or exhaustions in momentum before a probable wave 5 is shown (i.e. the fifth wave within the elliott five wave pattern). So for example, in an uptrend, the indicator may show a probable “wave 3” if there are no negative divergences. Once a divergence appears then the indicator may change the wave count to a “wave 5” provided the parameters for this wave count have been met. This default setting can be changed and removed if the chartist wishes to do so. So if the user wants to change the wave count from a probable “wave 5” to a potential “wave 3”, then the Alt 8 setting can be unselected (i.e. unticked) in the settings and then the Alt 1 can be selected. The indicator will then display a “wave 3” count until the price reverses and breaks below a key support level, thus changing the wave count from a “3” to a probable “5”. (The opposite of this example applies in downtrends.) A strict criteria setting is provided for charts of crypto.

The Elliott Wave indicator has options in the settings to change the positions of certain wave counts based on the structure of the chart. This is achieved by choosing the different major and minor structures based on the zigzag patterns of the chart. So the user can alter the positions of certain wave counts (if needed) by modifying the zigzag structure on the chart.

The lookback period in the settings can be increased (or decreased) to include more data on the chart, when needed. In the majority of situations the lookback period can remain at the default setting of 200 bars – but the user can decide to take into account more (or less) data by changing the lookback period to 300 (or 100 if less data is required).

In the elliott wave indicator, the potential major wave counts are shown in blue and the likely ABC counts (for wave 4) are shown in yellow. The starting point for the wave counts is shown as a green “wave 5” – this is referred to as the “historical wave 5” as it is the likely fifth wave of the prior wave. (For the most recent probable wave counts, such as ABC or 123, this is covered in the elliott wave addendum indicator).
The position of the wave counts, such as waves 1 & 2, 3, 4 and the historical wave 5 (in green) can be changed and modified to a reasonable degree. The historical wave 5 is the starting point where the indicator starts “counting” the waves. The indicator makes its best guess as to where to start counting from the historical wave 5, but the user has the option to change its position, if required as per the parameters set by the indicator. When the position of the green historical wave 5 is changed, this usually affects the entire wave count. The position of the historical wave 5 (green) can be changed by Alt6 in the settings of the elliott wave indicator. Alt4 can change the positions of waves 1 and 2 in the indicator. Alt5 can modify the position of the ABC waves within wave 4 (although by default they are set to major points on the chart). The position of wave 3 can be changed by Alt7. For wider “jumps” in the position of wave 3 and wave 5, the wider jump option can be enabled in the settings. For example, “Alt7Jump” has three ways of moving (or “jumping”) the wave 3 called J1, J2 and J3. The position of most wave counts can also be altered by modifying the major and minor structures or zigzag (which can sometimes change the wave count as well).

If the chartist decides to delay the changing of the wave count, such as delaying the change of wave 3 to a wave 5, then the option Alt10 “Delayed wave count” can be enabled. For example, if the indicator displays a probable “wave 5” on the chart, Alt10 can be enabled to change the wave count to a probable “wave 3” if the chartist decides it is reasonable or “logical” to do so. The Alt10 is similar to Alt1 in that both affect waves 3 and 5. However, Alt10 is less strict than Alt1 so it can often change the wave 5 to a wave 3 in the majority of situations. If Alt10 is enabled, it may be a good idea to ensure that the elliott wave addendum indicator is set to display an ABC wave count (instead of the 123) within the settings.

In certain circumstances where there are volatile conditions and charts, it is possible that the elliott wave indicator may show an “unusual” wave count. For example, it is possible that the positions of certain wave counts (such as waves 1, 2, 3 and 5) may be in the “wrong” order. This happens rarely so it is not an issue that happens very often. However, if this issue occurs, the chartist can rectify the matter by first increasing the lookback period (e.g. to 300) to see if this resolves the issue. If it does not, then Alt9 “temporary wave shift” in the elliott wave addendum can be enabled as this can usually resolve the issue and show the wave counts in a “proper” manner. Changing to a slightly lower timeframe can also usually resolve this issue. If Alt9 is enabled, care should be taken to unselect this option at a later date (as it is only a temporary solution).

The aggressive wave count setting (called “Aggressive 123”) is mainly for the addendum of the elliott wave indicator (i.e. EW addendum). Enabling this option can often change the wave count from an ABC to a 123 provided this is permitted by the parameters of the indicator. This option as well as others are included for further flexibility in the wave count.

The user can also choose to enable the zigzags of the waves to be shown on the chart. This can display the minor and major wave structures and zigzags, if enabled. By default it is set to off. It may also be a good idea to reset the settings of the indicators whenever a new chart or timeframe is chosen. This then refreshes the settings back to its default.

It is important to appreciate that the elliott wave indicator generally requires between 1,500 to 2000 bars of data on the chart in order to display the wave counts adequately and appropriately. So if a chart or timeframe has less than the minimum number of historical data or bars on the chart, the wave counts may not display properly or not appear at all. Certain chart symbols and timeframes (such as the monthly timeframe) may have very limited amount of data on them. Therefore, the elliott wave indicator will likely not appear on these charts or may not display properly. In these situations, a different chart symbol or a lower timeframe with more data on it can be chosen. For example, instead of a monthly timeframe, a weekly or daily timeframe can be chosen.

As mentioned, the elliott wave indicator is programmed to look for and identify potential trending patterns (as well as corrective patterns). In this sense, we are looking to simplify elliott wave theory by taking a more flexible and common-sense approach to the wave patterns. So if the price action has broken key levels of support or resistance, momentum is increasing and price is moving deliberately in a specific direction, it becomes more likely that price is in a trending environment (rather than just a correction).

If the main elliott wave indicator (i.e. LT Elliott Waves) is showing a probable wave 3, and price begins to pullback or move in the opposite direction to the main trend of the wave 3, the EW addendum may be used to display the probable ABC wave counts. These ABC wave counts could be for the likely wave 4 correction. However, if price starts to break key support levels (e.g. after an uptrend) and then reverse lower in the opposite direction (to the mentioned wave 3), then it is likely that the main indicator will change the wave count from a wave 3 to a wave 5. This can indicate that the main uptrend may have probably ended and that we are in either a large correction or a trend reversal, as shown by the EW addendum. This example can also apply in reverse for downtrends e.g. if price starts to break resistance levels and move higher after a downtrend.

We have allowed for further flexibility in the main elliott wave indicator i.e. LT Elliott Waves (and the EW addendum) so that the user can change the wave counts, if required. For example, the chartist can change the wave count from a probable wave 5 to a potential wave 3 – or a probable 123 to ABC (or vice versa) if they choose to do so. Further explanation and information is provided in the description for EW addendum. The position of the wave counts can be changed as well to a reasonable degree.

The chartist can apply other methods of chart analysis – such as trendline breaks, oscillators, regression channels, breaks of support/resistance – to determine when a probable wave (or wave count) has likely completed. For example, technical analysis methods such as trendline breaks and support/resistance breaks can be used by the chartist to determine the probability of whether wave 4 has potentially completed or not. In an uptrend, confirmation that a probable wave such as wave 4 has completed will not come until price has taken out the highs prior to the decline (i.e. the highs before the pullback in the probable “wave 4” correction). The same applies in reverse for a downtrend: confirmation that the probable wave 4 has completed will not come until price has taken out the lows prior to the rally (in a probable wave 4 correction).

It should be remembered that the appearance of the most recent wave counts (or wave labels) shown by the indicator, by themselves do NOT mean that the specific waves in question have definitely completed or finished. Nothing in chart analysis is certain or definite. The wave label itself is simply an indication that the most recent wave is probably still in progress, not necessarily that it has completed. Chartists can apply other technical analysis tools and methods (e.g. trend lines, support/resistance breaks, moving averages and regression channels etc.) to increase the probability of when a specific wave has probably completed. The same also applies to past or “completed” wave counts (or past wave labels): they do NOT mean that the specific waves have definitely completed or finished – it is merely a possibility or probability. So the risk always exists that the wave counts may potentially be wrong, and that an alternative wave count interpretation may exist.
Price action, markets and their charts are non-linear and chaotic, which means that they are subject to uncertainty, variable change and being unpredictable in nature. So we must maintain a probabilistic mindset and attitude to technical analysis. Nothing is certain. Therefore, no wave count is certain or “set in stone”. Wave counts, just like the actions and emotions of human beings, are subject to change. Elliott Wave theory, just like all of technical analysis is about what is possible, what is probable and what the risks are of a particular outcome. The advantage of elliott wave theory, as explained previously, is about gaining an understanding of context and the likely big picture. The indicator is provided in good faith but we do not vouch for its accuracy.

As mentioned previously, chartists should be aware of the probabilistic and uncertain nature of price action and the markets, and therefore prepare to limit and control any potential risks.

The indicator can be used on the charts of the majority of markets (e.g. stocks, indices, ETFs, currencies, cryptocurrencies, precious metals, commodities etc.) and any timeframe. Nothing in this indicator, its signals or labels should be construed as a recommendation to buy or sell any market (e.g. stocks, securities, indices, ETFs, currencies, cryptocurrencies, metals, commodities etc.). The indicator is provided solely for educational purposes, to gain a better understanding of technical analysis and elliott wave theory. It should be noted that the degree of noise and randomness increases significantly on lower timeframes. So the lower the timeframe that is chosen (e.g. 15-min or lower) the greater the degree of noise and randomness and therefore the higher the frequency of false signals or whipsaws. The indicator can be applied to candlestick charts and bar charts.

If you would like access, please send me a PM on Tradingview.