Knowledge · Terms · Elliott Wave

Elliott Wave

Indicator concept
Elliott-Wellen-Theorie
Market trends run in 5 impulse + 3 corrective waves. The third wave (W3) is usually the longest and strongest — Botty's Elliott entry looks for exactly its beginning.

What is Elliott Wave theory?

Formulated in the 1930s by Ralph Nelson Elliott: mass psychology produces fractal, repeating wave patterns. A complete cycle consists of:

  • 5 impulse waves (1–2–3–4–5) in the trend direction
  • 3 corrective waves (A–B–C) against the trend

Core rules: wave 2 never runs below the start of wave 1; wave 3 is never the shortest (usually the longest); wave 4 does not overlap the range of wave 1. Wave targets are often estimated via Fibonacci Retracement ratios.

Why wave 3?

Wave 3 is the most dynamic, with the strongest momentum and the fewest counter-moves — the most attractive part for a trend entry, if you have identified a valid W1-W2 structure.

How Botty uses Elliott

  • Entry elliott_wave_w3 (strategies/conditions/entries.py): detects a confirmed W1-W2 structure via a Fibonacci Retracement retracement of W1 (through indicators/zigzag.py, lookahead-free) and signals at the start of W3.
  • Filter ew_w3_filter: only allows trades when a valid W1-W2 structure exists in the signal direction.
  • Reality: in Botty's walk-forward, elliott_wave_w3 was the weakest performer (400+ trades/year in 2021, fee drag dominates) → sweep:False.

Criticism

Elliott is highly interpretation-dependent (the wave count is often only unambiguous in hindsight) — hard to implement causally/mechanically, which partly explains Botty's weak result.