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Elliott Wave Indicator

The Elliott Wave Indicator is a methodology for forecasting market prices by identifying repetitive patterns ("waves") created by collective investor psychology and price extremes.

What is the Elliott Wave Indicator?​

Developed by Ralph Nelson Elliott in the late 1930s, Elliott Wave Theory proposes that markets, rather than moving chaotically, unfold in repetitive wave patterns driven by investor sentiment and mass psychology. Elliott identified two main wave types:

  • Impulse Waves: move with the overall trend (a five-wave sequence)
  • Corrective Waves: move against the trend (a three-wave sequence)

A complete cycle is often described as a "5-3-5" structure: five impulse waves, followed by a three-wave correction, followed by another five-wave impulse.

The Three Rules of Elliott Wave​

  1. Wave 2 cannot retrace more than 100% of Wave 1
  2. Wave 3 cannot be the shortest among the three impulse waves
  3. Wave 4 cannot overlap with the price territory of Wave 1

Best Use Cases​

  1. Trend Identification: forecasting where prices are likely to head next, useful for entry/exit timing.
  2. Risk Management: understanding probable wave extensions helps set realistic stop-losses and profit targets.
  3. Cross-Market Analysis: comparing where different markets or assets sit within their own Elliott Wave cycle.
note

Elliott Wave analysis is inherently subjective. Wave counts can be interpreted differently by different traders, and there's no single, mechanically precise indicator that identifies waves the way RSI or MACD compute a value. The PineScript below approximates wave extension levels using Fibonacci ratios rather than performing true wave counting.

Elliott Wave PineScript for TradingView​

Here's a PineScript template that plots Fibonacci-based wave extension levels off recent highs and lows, a simplified, mechanical approximation of Elliott Wave analysis. Paste it into the Pine Editor, adjust the Fibonacci level, target, and stop loss to your preference, and backtest it.

info

To learn how to add this pinescript in TradingView, click here.

warning

This strategy is for demonstration purposes only and is not intended for actual trading. AlgoTest is not responsible for any profit or loss arising from the use of this sample strategy.

//@version=5
strategy("Elliott Wave Strategy", overlay=true)

// Input parameters
fib_level = input.float(1.618, title="Fibonacci Level")
length = input.int(10, "Length of Historical Candles")
target_points = input.int(100, title="Target Points")
stop_loss_points = input.int(50, title="Stop Loss Points")

// Calculate Fibonacci retracement levels
wave_high = ta.highest(high, 10)
wave_low = ta.lowest(low, 10)
wave_range = wave_high - wave_low
fib_0 = wave_high
fib_100 = wave_low
fib_1618 = fib_0 - fib_level * wave_range

// Plot Fibonacci retracement levels
plot(fib_0, color=color.blue, title="Fib 0.0")
plot(fib_100, color=color.red, title="Fib 100.0")
plot(fib_1618, color=color.green, title="Fib 161.8")

// Strategy logic
long_condition = ta.crossover(close, fib_1618)
short_condition = ta.crossunder(close, fib_1618)

// Strategy entry
if long_condition
    strategy.entry("Long", strategy.long)
if short_condition
    strategy.entry("Short", strategy.short)

// Calculate target and stop loss levels
long_target = close + target_points
long_stop_loss = close - stop_loss_points
short_target = close - target_points
short_stop_loss = close + stop_loss_points

// Strategy exit
strategy.exit("Long Exit", "Long", limit=long_target, stop=long_stop_loss)
strategy.exit("Short Exit", "Short", limit=short_target, stop=short_stop_loss)

Once you've backtested it, you can connect the alert to AlgoTest to automate live execution without manually watching the chart.

FAQ​

Does Elliott Wave really work?​

Elliott Wave Theory is well-respected and used by many professional traders and analysts. However, like any analysis tool, its effectiveness depends on proper application and market conditions.

What is the concept of Elliott Wave Theory?​

Elliott Wave Theory is based on the idea that markets follow predictable patterns called waves which are a result of investor sentiment and mass psychology.

What is the Elliott wave 5-3-5?​

This refers to the typical structure of Elliott Waves where a five-wave sequence (indicative of the trend) is followed by a three-wave sequence (a counter-trend correction), and then another five-wave sequence.

How do I identify my Elliott wave pattern?​

Identifying Elliott Wave patterns requires understanding of wave structures and their characteristics, such as wave length, wave height, and wave subdivisions. Traders often use charting software or manual analysis to help identify these patterns, since the counting itself is subjective.

What are the three rules of the Elliott wave?​

The three immutable rules of Elliott Wave Theory are: Wave 2 cannot retrace more than 100% of Wave 1, Wave 3 cannot be the shortest among the three impulse waves, and Wave 4 cannot overlap with the price territory of Wave 1.

For more insights and detailed analysis tools, visit AlgoTest Signals.