The Elliott Wave up trend in forex trading consists of five waves or swings. Waves 1, 3 and 5 are considered impulse (trend) and waves 2 and 4 are corrective(counter trend) waves. Wave 1 peaks, with resistance at the top of wave 1, and wave 2 corrects wave 1.
Wave 2 can be expected to retrace anywhere from 38.2 to 61.8% of wave 1, and sometimes back to the origin point. If wave 2 retraces all of wave 1, a double bottom is formed.
As the peak of wave 1 is surpassed, resistance may give way, and the price would then accelerate. This is typical after resistance level breakout. Wave 3 is often the longest of the waves.
Followers of the Elliott Wave often project that wave 3 will complete a new higher level for resistance, which would then form a Fibonacci expansion of wave 1, such as 138.2% to 261.8% of wave 1.
The peak of wave 3 establishes a new level of resistance, and wave 4 corrects wave 3. Wave 4 establishes a new support level. Wave 4 is expected to unfold in some manner different from the characteristic of wave 2.
For example, if wave 2 was deep, retracing 61.8% of wave 1, then wave 4 may be shallow and only retrace 38.2% of wave 3. Wave 4 should be expected to retrace back to the support level formed when wave 3 completed its internal wave 4 level.
Wave 4 is complete and wave 5 breaks through the resistance level (wave 3’s peak). The peak of wave 5 will form a new resistance level. Elliott Wave technicians will project wave 5 peak to be a ratio related to the height of wave 3, or from the height of the beginning of wave 1 to the peak of wave 3.