{"id":95038,"date":"2016-09-06T07:32:44","date_gmt":"2016-09-06T11:32:44","guid":{"rendered":"http:\/\/countingpips.com\/?p=95038"},"modified":"2021-12-09T17:00:05","modified_gmt":"2021-12-09T17:00:05","slug":"how-to-draw-trend-lines-with-elliott-wave","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/09\/how-to-draw-trend-lines-with-elliott-wave\/","title":{"rendered":"How to draw trend lines with Elliott Wave"},"content":{"rendered":"
September 6, 2016<\/div>
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By Admiral Markets<\/b><\/p>\n

\"New<\/p>\n

Dear Traders,<\/p>\n

Trend lines offer a wide range of analytical trading advantages – as shown in part 1<\/u><\/a> and part 2<\/u><\/a> of our special series.<\/p>\n

But trend lines are valuable in other ways too.<\/p>\n

Most notably:<\/p>\n

\u2026they help identify the start of analytical waves<\/u><\/a> within the Elliott Wave (EW) theory\u2026<\/p>

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\u2026and they recognize where the waves are expected to finish.<\/p>\n

By the end of this article, you will know how to correctly combine trend lines and waves.<\/p>\n

So let’s get started.<\/p>\n

The first step is to show you how to build a trend channel based on EW, then:<\/p>\n

    \n
  1. explain the value of such a channel<\/li>\n
  2. clarify how the same technique can be used in different conditions.<\/li>\n<\/ol>\n

    Sound difficult?<\/p>\n

    Don’t worry – our explanation is beginner friendly.<\/p>\n

    You can read more about it offline too, with our free ebook.<\/p>\n

    \"Wave<\/a><\/p>\n

    Connecting waves 1 and 3<\/h2>\n

    First of all, let’s start with two key rules for trend lines and waves.<\/p>\n

    Namely:<\/p>\n

      \n
    1. lines always require two points on the chart, before you can draw a trend line with EW<\/li>\n
    2. waves 1 and 3 are parts (or swings) of the chart, that show strong bearish or bullish momentum.<\/li>\n<\/ol>\n

      Keep this in my mind when you scan the charts.<\/p>\n

      Once you find a stronger third swing than the previous one:<\/p>\n

        \n
      1. move in the same direction<\/li>\n
      2. connect waves 1 and 3 with a trend line, which provides the angle of the trend<\/li>\n
      3. draw a new EW trend line, which is exactly parallel to the first line (in step 1)<\/li>\n
      4. hook the second trend line to the bottom of wave 2, which is the point connecting waves 1 and 3 (in case of an uptrend i.e. to the top in a downtrend).<\/li>\n<\/ol>\n

        \"EW<\/p>\n

        Hopefully you now have a trend channel visible on your chart and have successfully used trend lines with EW pattern.<\/p>\n

        If you don’t – follow the steps again.<\/p>\n

        Keep in mind that the steps might seem complicated at first:<\/p>\n

        …but risk-free practise<\/u><\/a> will make it much easier.<\/p>\n

        The importance of channel<\/h2>\n

        The channel offers a concrete method for finding support or resistance.<\/p>\n

        Specifically, it shows traders how to find wave 4.<\/p>\n

        In wave 4:<\/p>\n

          \n
        1. a bullish <\/em>channel indicates that price is expected to receive support <\/em>at the bottom <\/em>of the channel, which is the parallel trend line<\/u><\/a> connected to the support point of wave 2<\/li>\n
        2. a bearish <\/em>channel indicates that price is expected to receive resistance <\/em>at the top <\/em>of the channel, which is the parallel trend line connected to the resistance point of wave 2<\/li>\n
        3. the turning spot at the channel, is literally called wave 4.<\/li>\n<\/ol>\n

          As you can see below:<\/p>\n

            \n
          1. waves 2 and 4 are corrective movements (slow)<\/li>\n
          2. waves 1 and 3 are impulsive pieces of price action (quick).<\/li>\n<\/ol>\n

            \"EW<\/p>\n

            This technique often works well, but it occasionally has a weakness too.<\/p>\n

            When?<\/p>\n

            Most notably:<\/p>\n

            …if wave 4 turns out to be lengthy consolidation zones.<\/p>\n

            To counter that problem, you:<\/p>\n

              \n
            1. add a Fibonacci<\/u><\/a> retracement tool from the end point of wave 2, to the end point of wave 3)<\/li>\n
            2. keep an eye on the 23.6%, 38.2% or 50% Fibonacci retracement levels – which are where price should stop if it’s in a wave 4<\/li>\n
            3. note that if price does break the 50% Fibonacci level, then it is most likely not <\/em>a wave 4.<\/li>\n<\/ol>\n

              \"EW<\/p>\n

              Next forecasts with wave channels<\/h2>\n

              So now we’ve covered waves 1 to 4, let’s look at wave 5.<\/p>\n

              Wave 5 marks the end of the trend and<\/em> the channel.<\/p>\n

              The good news is:<\/p>\n

              …you can use more or less the same channel that helped connect waves 1 to 4.<\/p>\n

              Here’s how.<\/p>\n

              Firstly, connect waves 2 and 4 then:<\/p>\n

                \n
              1. hook the second trend line, to the top of wave 3 in an uptrend and the bottom in a downtrend<\/li>\n
              2. expect wave 5 to finish at the top of the channel in an uptrend and the bottom in a downtrend.<\/li>\n<\/ol>\n

                \"EW<\/p>\n

                Wave 5 does have one specific danger though:<\/p>\n

                \u2026it tends to lose momentum because the trend is almost completed.<\/p>\n

                But thankfully there is an effective countermeasure.<\/p>\n

                To avoid this danger, simply:<\/p>\n

                  \n
                1. draw a third EW trend line that is parallel to the first two trend lines, and<\/li>\n
                2. place it in the middle of the channel (the pink line in the image below).<\/li>\n<\/ol>\n

                  \"EW<\/p>\n

                  The third middle trend line offers a safer target spot for the completion of wave 5, than the official target at the top (bull) or bottom (bear) of the channel.<\/p>\n

                  Corrective trend line predictions<\/h2>\n

                  Price eventually makes a correction, even within trends.<\/p>\n

                  The neat thing is that traders can also use trend lines, for estimating price corrections.<\/p>\n

                  Remember, trend lines are especially formidable tools for establishing the start and finish of corrections.<\/p>\n

                  Now, to understand trend line predictions – you need to know that corrections take place as:<\/p>\n

                    \n
                  1. fast paced price movements called zigzags corrections, <\/em>or<\/li>\n
                  2. slower price movements called sideways corrections<\/em>.<\/li>\n<\/ol>\n

                    During a zigzag correction, <\/em>traders can exercise the same steps as mentioned for determining other waves – but alter by connecting different highs and lows.<\/p>\n

                    For example:<\/p>\n

                      \n
                    1. connect the trend line between a:\n
                        \n
                      1. top and lower high, during bearish reversal of the uptrend<\/li>\n
                      2. bottom and higher lower for bullish reversal of the downtrend<\/li>\n<\/ol>\n<\/li>\n
                      3. draw a second trend line, which is exactly parallel to the first line<\/li>\n
                      4. hook the second trend line to the:\n
                          \n
                        1. bottom in bearish reversal<\/li>\n
                        2. top in bullish reversal<\/li>\n<\/ol>\n<\/li>\n
                        3. note the main target (see green checks in below image), is the\n
                            \n
                          1. support trend line in bearish reversal<\/li>\n
                          2. resistance trend line in bullish reversal ( see the green check in image).<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n

                            \"EW<\/p>\n

                            During a sideways correction, traders can connect various tops and bottoms – to determine a wide range of EW chart patterns.<\/p>\n

                            Please view our dedicated webinar, for a full overview of all the available patterns.<\/p>\n