THE WAVE PRINCIPLE 
Detailed Explanatory Notes Expounding the Doctrine of R.N.Elliott's "The Wave Principle" "No truth meets more general acceptance than that the universe is ruled by law. Without law it is selfevident there would be chaos, and where chaos is, nothing is. Navigation, chemistry, aeronautics, architecture, radio transmission, surgery, music  the gamut, indeed of art and science  all work, in dealing with things animate and things inanimate, under law because nature herself works in this way. Since the very character of law is order, or constancy, it follows that all that happens will repeat and can be predicted if we know the law"  R.N.Elliott, (18711948). Table of contents


R.N.Elliott & his DiscoveryThe Wave Principle is Ralph Nelson Elliott's discovery that a specific and methodical repetition exists in the markets continuing gyrations. His studies of this phenomenon led to the distilling of a comprehensive and exact method of pattern recognition from which the seemingly chaotic activity of the markets could be viewed in an orderly manner. Once identified, each pattern was named, defined and illustrated with descriptions of how each are intimately linked together to form the basis of selfsimilar structures of larger variation. The characteristics of this principle are not only found in the markets, but exist throughout every material system  from the expanse of universal galaxies to the tiniest molecule. Universal Principles  Three ArchetypesThere are three Universal laws that govern these principles  the Law of Vibration, which states that matter is continually in motion  the Law of Polarity, which describes the existence of positive and negative forces emanating from a singular origin. These are searching for a state of equilibrium found by oscillating to the mathematical ratio relationships of Nature's very own rhythm; that of the 'golden ratio' 0.618  and the Law of Compensation, that for every action there exists an opposite reaction, a balancing of forces that compliments expansion and growth with regression and decay. Natures Law  Five CharacteristicsIn order to conceptually understand the manner in which the Wave Principle is applicable to market price behaviour, there are a further five characteristics that are essential to recognise.
Once these elements of the market are understood, then it becomes easier for the mind to grasp the concept of the qualities of order, proportion, symmetry and harmony found in them. As universal law states, for every action there exists an opposite reaction in a continually expanding state, and this is mirrored in the markets by the development of 'trend' and 'countertrend', action and reaction or progression and regression evolving over and over again. This basic of functions is at the core of the Wave Principle and all patterns are subsumed by it. Some of the patterns define trend whilst others countertrend  but all fall within one of these two descriptions. The Wave ConceptElliott used the word 'wave' to describe the effects of price movement in his work. One definition describes a 'wave' as … a temporary occurrence or increase of a condition, emotion or influence … the passage of undulating motion… a single curve in the course of this motion…. This aptly describes the visual necessity to individualise a segment of market price movement even though any 'wave' is both a component and contains components of its surroundings. 

Definition of TrendProgress or 'trend' is defined by a series of movements that unfold into five wave patterns. This process is not exclusive to one direction  a trend can develop in either an advance or a decline. A requisite though is that it must develop so that its measurements expand activity, so that the termination point is distant relative to its starting point. In its entirety, a five wave pattern is described in Elliott terms as an 'impulse'  to convey the image of an indefinitely large force acting for a very short time but producing a finite change of momentum. Each wave is allocated a number in an ascending sequence from the point of origin, 12345. Wave 1 establishes the direction of the ongoing movement, the following waves then alternating so that when the entire pattern is viewed in isolation, waves 1,3 and 5 constitute trend by moving in the same direction as the overall movement, and waves 2 and 4 in an opposite direction each constituting countertrend. Waves 1, 3 and 5 subdivide into a 'five' wave pattern whereas waves 2 and 4 become the 'corrective' wave components within an overall 'impulsive' structure and must therefore subdivide into a 'three' wave pattern  this distinction of five waves defining 'trend' and three waves as 'countertrend' is the foundation of nonlinearity (refer 'Natures Law  Characteristics', above) (see activity left of blackdotted vertical line in fig's #1 & #2). 

Definition of CounterTrendRegress or 'countertrend', also termed as 'correction/corrective' is determined by a series of movements that unfold into three wave patterns. This process is not exclusive to one direction  a countertrend can develop in either a decline or an advance. Its requisite though is that it measurements consolidate activity to create an effect of contraction  but this can only conceptually occur relative to its position of the preceding 'impulse'. This is because even three wave sequences are seen to make progress when viewed in isolation. Each wave is allocated a letter in an ascending sequence from the point of origin, ABC. Wave A establishes the direction of the ongoing movement, the following waves then alternating so that when the entire pattern is viewed in isolation, waves A and C constitute trend by moving in the same direction as the overall movement, whilst wave B in an opposite direction constituting countertrend. Therefore, waves A and C become the 'impulse' wave components within an overall 'corrective' structure and must therefore subdivide into a 'five' wave patterns. Wave B subdivides into a 'three'  (see activity right of blackdotted vertical line in fig's #1 & #2). Trends and countertrends share a distinctive commonality  the substructures that identify them contain sequences of alternating five and three wave patterns. Their distinguishing characteristic however, is derived from the amount of 5's and 3's that develop. This results in a significant fact  whether a sequence unfolds as a 5 or 3 depends solely on its relative position to its larger counterpart. 

The 'Cycle'When a five wave sequence has ended, it must be followed by a three wave sequence of opposite directional movement totaling eight waves and completing what is known as a 'cycle'. This forms the basic component within a larger, selfsimilar pattern so that the five wave sequence becomes wave 1, and the three wave sequence becomes wave 2 of another but larger cycle process. This process is a continuous one, so that smaller waves become the components of their larger counterpart  ad infinitum. As long as progress continues, the process of building to greater degrees continues. Equally true is that of the reverse process where larger patterns continually subdivide into lesser degrees until price data is at viewed at the shortest possible time fragment. Therefore, all waves are both components of a larger pattern and are themselves a larger pattern that contains smaller component waves. This typically characterises the fractal nature of how the markets evolve where the basic form is maintained throughout every degree of magnitude  selfsimilar patterns existing and repeating at all levels. Therefore, the essential underlying tendency of the Wave Principle is that action in the same direction as the existing degree of trend (up or down) develops in five waves, whilst reaction against the existing degree of trend (up or down) develops in three waves. 

A Hierarchy of PatternPatterns build into varying degrees of size that are connected through their relative proportionate relationships which necessitates the categorising of each into a hierarchical order so that the correct sequence can be determined for ongoing development. Elliott discerned and subsequently named nine degrees of waves that had practical value at that time. Today, we can extend his list as realtime data can be manipulated to show patterns building from the smallest time periods. Elliott's list begins with the largest waves and descending in order. The font/typeface used for numbers and letters however is our own, suited to the use of a computer. Any system can be used however  the main importance is to know the hierarchy of the order used. (see fig #3) From a practical standpoint, the use of this system of nomenclature enables the identification of the exact position of the market at any time within its overall progression. Terminology used in this process uses the name and number/letter of each degree of wave, e.g. …minor wave iii. of Intermediate wave (1) of Primary wave A is currently in progress…. 

Thirteen Patterns(see fig #4) Elliott originally documented eleven basic but specific patterns that replicate in the markets  not exactly, but in form. This excludes the 'sideways' double and triple three variations that we find so rare in actual historical price movement as to question their very existence. Through empirical analysis and recorded documentation, this list adds two other patterns  the 'expanding' diagonal and the 'running' flat. Our current list therefore numbers the complete list as thirteen. By observing these graphically, composing them into their respective hierarchical order and applying them to certain governing rules, it is possible to forecast future activity in a twodimensional way  pattern and price. Each pattern is assigned a shortened code that appears after their definition, e.g. Impulse  Expanding (ImpExp5W), see also WaveSearch. As follows: 

Trend  Impulse (5's)There are two archetypal impulse patterns, 'Expanding' & 'Diagonal'. The expanding impulse consists of 5 waves but one sequence (1, 3, or 5) 'extends' or measures larger than the others whilst (quite often, but not mandatory) visible fractalisation occurs, with a subset five wave sequence embedded within, making the overall appearance nine waves. This is known as a 'derivative' of the archetypal five wave structure. Within the extended wave, fractalisation can also occur at additional smaller degrees of trend, increasing the overall appearance to thirteen or seventeen waves. Despite extended waves often unfolding into the fractalised process, the overall appearance of 'form' and structure does not change its basic elements of a 5 wave sequence of 'like for like' degrees. This uniformity categorises the expanding impulse as just one of the two archetypes. (see fig #5) The diagonal itself forms into two distinct pattern variations; the 'contracting' and 'expanding' type shapes. Both retain consistency insomuch they subdivide into 5 wave sequences, but different to the expanding impulse pattern because 'expansion' is not visible in its structure because the price activity of waves 1 and 4 'overlap' or close the gap that price expansion (in the 3rd wave) would otherwise prevent. Their consistency in 'form' means bundling them together and listing them as just one 'archetypal' pattern, but because their shapes are quite different, mirror images of each other even when comparing 'like for like' degrees of trend, they must be separated into two distinct types. The derivative of the diagonal is, like its expanding counterpart, dependent on the fractalisation process. Distinct differences of pattern contained in the impulse wave sequences, 1, 3 & 5 determine the location of the diagonal  either as the beginning sequence of a larger pattern, named a 'leading' diagonal, or as the ending sequence of a larger pattern, named an 'ending' diagonal. For more information, see subheadings below: Diagonal/Leading & Diagonal/Ending. (see fig #5a) This increases our list of impulse patterns to a total of three types:


CounterTrend  Corrective (3's)There are three archetypal corrective patterns, 'Zig Zag', 'Flat' & 'Triangle'  each forms into two or three additional variations or derivatives making a total of ten differing shapes or types. These countertrend patterns are commonly referred to as unfolding into 3's, or specifically, three main priceswings or waves and are assigned 'letters', ABC [DEX etc.] to differentiate them from the numbers assigned to impulse patterns (see above). The zig zag and the flat 'family' unfold in this way, but the triangle generally consists of five main priceswings or wave sequences (although we have discovered and documented some that form only into 3's). The triangle is different to the impulsediagonal because it develops as horizontal priceactivity and its location in waves 4, B or X provides additional distinctiveness. The single zig zag is the most frequent recurring 'corrective' or countertrend pattern and this is partly because it must also unfold at the beginning sequence (wave A) of each of the other corrective pattern types. The derivative of the zig zag is the double and triple patterns. These are replications of the single zig zag interspersed with an 'X' wave, the separation sequence. Contrary to common belief, triple zig zag patterns are uncommon, not frequently found recurring. (See fig #6) The flat is characterised by R.N.Elliott as three priceswings of horizontal movement that develop 'against' (opposite) to the prevailing (existing) trend labelled ABC. Its derivatives are the 'expanding' flat and the 'running' flat. The basic form remains the same, but waves B & C of the expanding flat variation briefly exceed the original price extreme (pricerange) established by wave A. Contrary to common belief, this is the most frequently recurring pattern found developing in the markets of the 'flat' family. For the running flat, wave B trades briefly beyond the priceextreme but wave C does not, ending within the price range of wave A. (See fig #6a) The triangle pattern is like its 'flat' counterpart, characterised by horizontal price movement but this time, commonly evolving into five priceswings, labelled ABCDE. The triangle archetype is the 'contracting' pattern with the widest part established by wave A at the beginning with wave E the smallest priceswing at the conclusion, the entire process unfolding within two narrowing border lines completing before the 'apex'. The derivatives are the 'ascending', 'descending' and the 'expanding' types. Each maintains the form of horizontal ABCDE priceswings, with two boundary lines encompassing the price ranges with either horizontal tops or bottoms combined with inclining/declining tops/bottoms. The expanding triangle is the exception where successive waves to A sequentially trade slightly beyond the preceding sequence so that the two boundary lines funnel outwards like the shape of a gramophone, the apex at the beginning with the widest point at the end, as wave E. This is the mirror image of the contracting triangle. (See WaveSearch to view the entire list of patterns). (See fig #6b)


CounterTrend  Complex Corrective 'Double & Triple 3's (7/11's)In R.N.Elliott's original work, 'Nature's Law  The Secret of the Universe' 1946, he describes on page 17 the nature of single, double and triple 3's. These patterns are classified as countertrend but evolve into either 7 or 11 wave sequences. They fall into three groups, evolving with a slight slanting gradient, horizontal or mixed consisting of both. The first two types can be subsumed (covered) by the derivatives of the zig zag and the flat. The mixed type consists of combining zig zags and flats, or flats and zig zags in alternating fashion. Even triangles can be used to extend the list to 13 wave sequences. These patterns are considered extremely rare and seldom develop with any recurring frequency in the markets. The double 3 pattern will consist of 7 waves or priceswings, for example, combining a single zig zag (3 waves), an intervening X wave (1) and a horizontal flat (3). A triple 3 pattern will consist of 11 waves or priceswings, for example, combining a single zig zag (3 waves), an intervening X wave (1) an expanding flat (3) another X wave (1) and finally a horizontal flat (3). We have created a complete list of these combinations, 22 in all that can be viewed in WaveSearch. (see two examples in fig #7).
Part II.  Coming Soon! In this next tutorial series we shall introduce the 'Pattern Identification Process' and R.N. Elliott's 'Rules & Guidelines'. 
