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®SelWave Wave Principle
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| SelWave Wave-Principle | The Wave-Principle | Wave-Prinzip |
According to physical law: "Every action creates an equal and opposite reaction". The same goes for the financial markets. A price movement up or down must be followed by a contrary movement, as the saying goes: "What goes up must come down"( and vice versa).
Price movements can be divided into trends on the one hand and corrections or sideways movements on the other hand. Trends show the main direction of prices, while corrections move against the trend. In SelWave's terminology these are called Impulsive waves and Corrective waves.
The Impulse wave formation has five distinct price movements, three in the direction of the trend (I, III, and V) and two against the trend ( II and IV).
Obviously the three waves in the direction of the trend are impulses and therefore these waves also have five waves. The waves against the trend are corrections and are composed of three waves.
The corrective wave formation normally has three, in some cases five or more distinct price movements, two in the direction of the main correction ( A and C) and one against it (B). Wave 2 and 4 in the above picture are corrections. These waves have the following structure:
Note that these waves A and C go in the direction of the shorter term trend, and therefore are impulsive and composed of five waves, which is shown in the picture above.
An impulse wave formation followed by a corrective wave, form an SelWave degree, consisting of trend and counter trend. Although the patterns pictured above are bullish, the same applies for bear markets, where the main trend is down.
The following example shows the difference between a trend (impulse wave) and a correction (sideways price movement with overlapping waves). It also shows that larger trends consists of (a lot of ) smaller trends and corrections, but the result is always the same.
Very important
in understanding the Sel Wave Principle is the basic concept
that wave structures of the largest degree are composed of smaller
sub waves, which are in turn composed of even smaller sub waves, and
so on, which all have more or less the same structure ( impulsive or
corrective) like the larger wave they belong to.
Selzer-McKenzie distinguished nine wave degrees ranging from two centuries to
hourly. Below, these wave degrees are listed together with the style
we use to distinguish them:
Studying the patterns is very important in order to apply the SelWave Principle correctly. The pattern of the market action, if correctly determined, not only tells you to what price levels the market will rise or decline, but also in which way (or pattern) this will happen.
When you are able to recognize the patterns, and apply these patterns correctly, you can trade the SelWave Principle. This is not easy to accomplish, but after some study and with the help of our "detailed and personalized daily chart service" tool you will find it easier. Humans, with sufficient experience, can analyse markets in an instance, which is a requirement for trading.
Our daily chart service restricts itself mainly to the patterns mentioned in the Classic SelWave patterns. We analysis these patterns using the Classic Rules.
We also use the Modern Rules, as mentioned under Modern SelWave patterns, we have defined more patterns, which we have found after more than 10 years of research and experience, which definitions are more profitable in our view. This way we make available our knowledge and experience without any extra costs.
After looking at the big picture we then determine which rules are preferable.
Explaining the following descriptions, on the left you will find a picture of a bull market, at the right one of a bear market.
The pattern section depicts the structure, while the description gives additional information. The pattern should follow the rules and guidelines, which can also be derived from the picture. Furthermore the section, in which wave explains in which wave, as a part of a larger wave degree, the patterns normally occur. Last but not least the pattern must have an internal structure as described. This is very important to determine which pattern you are dealing with.
Below we have depicted all SelWave patterns that are allowed under a very strict interpretation of the SelWave Principle. SelWave detected most of these patterns, except for the Diagonal 2 pattern. The WXY and WXYXZ pattern have not been defined as such by SelWave, but he already had discovered these sort of combinations.
In our daily analysis we use the WXY and WXYXZ also for Double and Triple Zigzags. This is a much more consistent way of labeling these patterns, since now the ABC waves in waves W and Y are sub waves and an unfitting Wave X has been eliminated.
Because of this, in our daily analysis we no longer have to search for more than five waves. Using the old definition of for example a Triple Zigzag, the search was for eleven waves, apart from inconsistencies this would have slowed down our analysis considerably.
a. Impulse
Pattern
Description
Impulses are always composed of five waves, labeled 1,2,3,4,5. Waves 1, 3 and 5 are themselves each impulsive patterns and are approximately equal in length. Waves 2 and 4 on the contrary are always corrective patterns.
Rules and guidelines
The most important rules and guidelines are:
In which wave
Impulse patterns occur in waves 1, 3, 5 and in waves A and C of a correction( this correction could be a wave 2, 4 or a wave B, D, E or wave X).
Internal structure
It is composed of five waves. The internal structure of these waves is 5-3-5-3-5. Note that the mentioned 3s are corrective waves, which should be composed of 5 waves in a corrective triangle.
b. Extension
Pattern
Description
By definition an extension occurs in an impulsive wave, where waves 1, 3 or 5 can be extended, being much longer than the other waves. It is quite common that one of these waves will extend, which is normally the third wave. The two other waves then tend to equal each other.
In our pattern definitions we call it an Extension1 if the first wave extends, an Extension3 if the 3rd wave extends and an Extension5 if the 5th wave extends.
Rules and guidelines
The most important rules and guidelines concerning an extended wave are:
In which wave
Extensions occur in waves 1, 3, 5, and in A and C waves, when compared to each other.
Internal structure
As a minimum it is composed of 9 waves, though 13 or 17 waves could occur. So the minimal internal structure of the 9 waves is 5-3-5-3-5-3-5-3-5. Note that the 3s mentioned are corrective waves, which could be composed of 5 waves in the case of a corrective triangle.
c. Diagonal triangle type 1
Pattern
Description
Diagonals are sort of impulsive patterns, which normally occur in terminal waves like a fifth or a C wave. Don’t confuse them with corrective triangles.
Diagonals are relatively rare phenomena for large wave degrees, but they do occur often in lower wave degrees on intra-day charts. Usually Diagonal triangles are followed by a violent change in market direction.
Rules and guidelines
The most important rules and guidelines are:
In which wave
Diagonal triangles type 1 occur in waves 5, C and sometimes in wave 1.
Internal structure
The internal structure of the five waves is 3-3-3-3-3.
c. Diagonal triangle type 2
Pattern
Description
Diagonal type 2 is a sort of impulsive pattern, which normally occurs in the first or A wave. The main difference with the Diagonal Triangle type 1 is the fact that waves 1, 3 and 5 have an internal structure of five waves instead of three. Experience shows it can also occur in a wave 5 or C, though the SelWave Principle does not allow this. Don’t confuse this with corrective triangles.
Diagonals are relatively rare phenomena for large wave degrees, but they do occur often in lower wave degrees in intra day charts. These Diagonal triangles are not followed by a violent change in market direction, because it is not the end of a trend, except when it occurs in a fifth or a C wave.
Rules and guidelines
The most important rules and guidelines are:
In which wave
Diagonal triangles type 2 occur in waves 1 and A.
Internal structure
The five waves of the diagonal type 2 show an internal structure of 5-3-5-3-5.
d. Failure or Truncated 5th
Pattern
Description
A failure is an impulsive pattern in which the fifth wave does not exceed the third wave. Fifth waves, which travel only slightly beyond the top of wave 3, can also be classified as a kind of failure. It indicates that the trend is weak and that the market will show acceleration in the opposite direction.
Rules and guidelines
The most important rules and guidelines are:
In which wave
A failure can only occur in a fifth wave or a C wave, but normally not in the fifth wave of wave 3.
Internal structure
It must be composed of five waves.
a. Zigzag
Pattern
Description
A Zigzag is the most common corrective structure, which starts a sharp reversal. Often it looks like an impulsive wave, because of the acceleration it shows. A zigzag can extend itself into a double or triple zigzag, although this is not very common, because it lacks alternation (the same two patterns follow each other). Notice that the zigzag can only be the first part of a corrective structure.
Rules and guidelines
In which wave
Most of the time it happens in A, X or 2. Also quite common in B waves as a part of a Flat, (part of) Triangles and sometimes in 4.
Internal structure
A single Zigzag is composed of 3 waves, a double of 7 waves separated by an X wave in the middle, a triple of 11 waves separated by two X waves (see pictures below). The internal structure of the 3 waves is 5-3-5 in a single Zigzag, 5-3-5-3-5-3-5 in a double.
Example of a Double Zigzag
As you have noticed we have a more modern representation of the Double Zigzag using the labels WXY instead of ABCXABC. This is more consistent, since this way 2 zigzags of lower degree get connected to each other by waves of higher degree. On top if that, our automatic analysis needed such a consistent method of labeling to reach maximum performance. Instead of labeling 7 waves (ABCXABC), in our daily analysis we need to label only 3 waves (WXY). According to the same method a Triple Zigzag is represented by WXYXZ instead of ABCXABCXABC. This way the number of waves was reduced to five instead of eleven.
b. Flat
Pattern
Description
Flats are very common forms of corrective patterns, which generally show a sideways direction. Waves A and B of the Flat are both corrective patterns. Wave C on the contrary is an impulsive pattern. Normally wave C will not go beyond the end of wave A.
Rules and guidelines
In which wave
It occurs mostly in B waves, though also quite common in 4 and 2.
Internal structure
As mentioned before a Flat consists of 3 waves. The internal structure of these waves is 3-3-5. Both waves A and B normally are Zigzags.
c. Expanded Flat or Irregular Flat
Pattern
Description
This is a common special type of Flat. Here the B wave is extended and goes beyond the (orthodox) end of the previous impulsive wave. The strength of the B wave shows that the market wants to go in the direction of B. Often a strong acceleration will take place, which starts a third wave or an extended fifth. If the C wave is much longer then A, the strength will be less.
Rules and guidelines
In which wave
This corrective pattern can happen in 2, 4, B and X. If it happens in 2 and C is relatively short, normally an acceleration in the third will take place.
Internal structure
It is composed of five waves, which have an internal structure of 3-3-5.
c. Triangles
Contracting Triangle:
Pattern
Description
A triangle is a corrective pattern, which can contract or expand. Furthermore it can ascend or descend. It is composed of five waves, each of them has a corrective nature.
Rules and guidelines
In which wave
Triangles occur only in waves B, X and 4. Never in wave 2 or A.
Internal structure
It is composed of five waves, of which the internal structure is 3-3-3-3-3.
Expanding Triangle:
Ascending Triangle:
This is a triangle, which slopes upwards. This pattern has been implemented in the Modern Rules.
Descending Triangle:
This is a triangle, which slopes downwards. This pattern has been implemented in the Modern Rules.
Running Triangle:
This is a triangle where the B wave exceeds the origin of wave A.
d. WXY or Combination
Many kinds of combinations are possible. Below a rather complex example has been depicted.
Pattern
Description
A Combination combines several types of corrections. These corrections are labeled as WXY and WXYXZ if it is even more complex. It starts for example with a Zigzag (wave W), then an intermediate X wave, then a Flat (wave Y) and so on. A so-called double or triple three is also a Combination, but this pattern combines Flats separated by X waves.
Rules and guidelines
In which wave
Generally a Combination occurs mostly in B, X and 4, it is less common in A and rare in 2.
Internal structure
For example a Zigzag, followed by a Flat, followed by a Triangle has the following internal structure:
5-3-5(Zigzag)-5-3-5(X)-3-3-5(Flat)-3-3-3-3-3(Triangle).
e. Running Flat
Pattern
Description
The Running correction is a rare special form of a failure. This pattern is a kind of Flat, with an elongated B wave and a very small C wave. According to theory wave C should be so short that it doesn’t get to the price territory of wave A. In our daily analysis we do not accept a C wave that fails to reach the price territory of wave A.
Instead of a running correction this could in theory be an extension in an impulsive wave, where the wave has subdivided in two (or more) 1,2 combinations. If the B is a clear three wave, then it is a Running correction, otherwise an extension. In practice there will not be any difference in market direction: in both scenarios the market will explode in the direction of the B wave, therefore we prefer to label it as an extension. For the sake of correctness we do included this pattern in our daily analysis.
Rules and guidelines
In which wave
Most of the time it should occur in wave 2 or B.
Internal structure
It is a
three-wave structure. The internal structure is
3-3-5.
X wave
Description
An X wave is an intermediate wave in a more complex correction. This wave is always corrective and can take many forms like a Zigzag, Double Zigzag, Flat, Expanded Flat, combination and a triangle.
In our Modern Rules observations and analysis we have defined extra patterns that are mostly hybrid patterns derived from the known patterns that have existed from the beginning. In addition, we allow for the occurrence of more patterns in some waves. For example, wave 1 may also contain a diagonal1, diagonal2 and impulse 2 pattern, in addition to the other trend patterns, that a classic interpretation accepts.
a. Impulse 2
Pattern
Description
An Impulse 2 is an uncommon pattern that resembles a normal impulse considerably. In our daily analysis we allow for a maximum retracement of 51.5% for wave 4 in an impulse or other trend pattern. Of course sometimes the retracement of wave 4 could be 51.6% and an impulse would then be eliminated, in spite of the fact that the limit was exceeded by 0.1% only. Naturally the SelWave does not apply this strictly and the Impulse 2 pattern corrects for this problem. Apart from this, we have witnessed a retracement up to 62% for a wave 4 frequently in intra day charts.
Rules and guidelines
The same rules and guidelines apply as with a normal impulse except for the following:
In which wave
Impulse 2 patterns mostly occur in waves 1,A or C, never in a wave 3!
Internal structure
It is composed of five waves. The internal structure of these waves is 5-3-5-3-5. Note that the mentioned 3s are corrective waves, which could be composed of 5 waves in a corrective triangle.
a. ZigzagFlat
Pattern
Description
It is a common pattern that is exactly the same as a Zigzag, except for the fact that the B wave is allowed to retrace more than 61.8% of wave A.
b. Running Zigzag
Pattern
Description
Apart from contracting Triangles, a failure in a corrective pattern happens when the C wave is shorter than wave A and fails to go beyond the end of A. This mostly happens in Running Flats and or in Zigzags. It indicates strength in the direction of the main trend.
Rules and guidelines
In which wave
Failures can occur in a C wave of wave 2, in a C or E wave of wave 4, in a C wave of wave B or X.
c. Failed Flat
Pattern
Description
This pattern is exactly the same as a Flat, except for the fact that wave C does not reach the end of wave A and therefore is shorter than wave B.
d. Running Flat (modern)
Pattern
Description
This pattern is exactly the same as a Running Flat, except for the fact that it must retrace more than 60%, if not we consider it to be a normal Running Flat. This distinction is necessary, because normally a Running Flat is rare. But if it retraces more than 60% and still fails to reach the end of wave A, it suddenly becomes much more probable the pattern will occur. In which case it will get a much higher score.
e. Ascending and descending Triangles
Description
These are mentioned under the Triangles description in the Classic patterns section. Basically these patterns are the same as common contracting triangles, except for the fact that ascending and descending triangles slope up or down.
Channeling is an important tool not only to determine which sub waves belong together, but also to project targets for the next wave up.
Channels are parallel lines, which more or less contain the complete price movement of a wave. Although the trend lines of a Triangle are not parallel lines, they will also be considered as a channel. Underneath you see an example of a channel in an impulsive wave and all channels in a corrective wave. Note that all patterns in the section "Patterns" show their channels.
The picture of the corrective structure labeled A,B,C shows clearly how channels indicate which waves should be grouped together.
Waves of the same degree can be recognized by drawing channels. Especially this is the case for Impulse (5) wave structures, Zigzags and Triangles. If these waves do not equate properly, you have a strong indication to search for an alternative count.
Next you will learn how to draw channels and how to project targets using channels.
Targets for wave 3 or C
To begin with you should draw a channel as soon as waves 1 and 2 are finished. Connect the origin of wave 1, which has been labeled as zero, and the end of wave 2. Then draw a parallel line from the top of wave 1.
Generally this channel is regarded as not being very useful, but it is. First of all, the parallel line serves as an absolute minimum target for the 3rd wave under development. If the 3rd wave can’t break through the upper line or fails to reach it, you are probably dealing with a C wave instead of wave 3.
Furthermore the base line from 0 to wave 2 serves as a stop. When this base line gets broken, there is a strong probability that wave 2 (or B) gets more complex, thus wave 3 or C has not begun yet.
Keep in mind that wave 3 is normally the strongest wave and often will go far beyond the upper trend line.
Targets for wave 4
As soon as wave 3 is finished you can draw a channel by connecting the end of wave 1 and wave 3 with a trend line and drawing a parallel line from the end of wave 2. In this way you can project a target for wave 4. Keep in mind that normally the base line from wave 2 will be broken slightly by the price action of wave 4. The base line serves as a minimum target for wave 4. If wave 4 doesn’t come near the base line at all, this is a sign of a very strong trend. You are probably still in wave 3 or you should get ready for a blow off in wave 5.
Targets for wave 5
Method 1
As soon as wave 4 is finished you can draw a channel connecting the end of wave 2 and wave 4 with a trend line by drawing a parallel line from the end of wave 3. In this way you can project a target for wave 5. In most cases wave 5 will fail to reach the upper trend line, except when you are dealing with an extension in wave 5 or when wave 3 has been relatively weak. In an extension, which is also indicated by high volume and momentum indicators, a throw over can occur.
Method 2
Mostly wave 3 is the strongest wave showing a very fast acceleration relative to waves 1 and 5. If wave 3 indeed shows a nearly vertical rise or decline, then draw a trend line connecting wave 2 and 4 and draw a parallel line from wave 1(!). This parallel line will cut through wave 3 and will target wave 5. Experience shows this to be a very valuable channel.
Targets for wave D and E
As soon as wave B is finished you can draw a trend line connecting the origin of wave A and the end of wave B to get a target for wave D, provided a triangle indeed is developing. This is more certain after completion of wave C.
As soon as wave C is finished you can draw a trend line connecting wave A and the end of wave C to get a target for wave E. Wave E almost never stops at the trend line precisely, it either never reaches the trend line or it overshoots the trend line fast and temporarily.
Targets in a Double Zigzag
Drawing a channel is very useful to separate Double Zigzags from impulsive waves, which is difficult since both have impulsive characteristics. Double Zigzags tend to fit a channel almost perfectly, while in an impulsive wave the third wave clearly breaks out of the channel.
The Fibonacci series are a mathematical sequence in which any number is the sum of the two preceding numbers. The sequence goes as follows: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on. The properties of this sequence appear throughout nature and also in the arts and sciences. Most notably the ratio of 1.618, the "Golden Mean", is very common, a relationship already discovered in ancient times. This number can be approached by dividing a Fibonacci number by its preceding number as the sequence extends into infinity. Besides, ratios of .618, which is the inverse of 1.618 are very prominent when analysing Fibonacci relationships.
The wave counts of the impulsive and corrective patterns (5 + 3 = 8 total) are Fibonacci numbers, and breaking down wave patterns into their respective sub waves produces Fibonacci numbers indefinitely.
Analysing Fibonacci relationships between price movements is very important for several reasons.
First you can control your wave analysis. The better the Fibonacci ratios of your wave count, the more accurate your count is, because in some way or the other, all waves are related to each other. Secondly you can project realistic targets once you have defined the wave count correctly or you have distinguished different scenarios, which point in the same direction.
Since Fibonacci ratios manifest themselves in the proportions of one wave to another, waves are often related to each other by the ratios of 2.618, 1.618, 1, 0.618, 0.382 and 0.236. This fact can help you in estimating price targets for expected waves.
If, for example a wave 1 or A of any degree (or time frame) has been completed, you can project retracements of 0.382, 0.50 and 0.618 for wave 2 or B, which will give you your targets. Most of the time the third wave is the strongest, so often you will find that wave 3 is approximately 1.618 times wave 1. Wave 4 normally shows a retracement, which is less than wave 2, like 0.236 or 0.382. If wave three is the longest wave, the relationship between wave 5 and three often is 0.618. Also wave 5 equals wave 1 most of the time.
The same relations can be found between A and C waves. Normally C equals A or is 1.618 times the length of A.
You could even combine waves to find support and resistance zones. For example the net price movement of wave 1 and 3 times 0.618 creates another interesting target for wave 5.
It is worthwhile to experiment a lot with your wave count, Fibonacci will help you to solve the rhythm of the markets.
Targets for wave 1
The first wave, a new impulsive price movement, tends to stop at the base of the previous correction, which normally is the B wave. This often coincides with a 38.2% or a 61.8% retracement of the previous correction.
Targets for wave 2
Wave 2 retraces at least 38.2% but mostly 61.8% or more of wave 1. It often stops at sub wave 4 and more often at sub wave 2 of previous wave 1. A retracement of more than 76% is highly suspicious, although it doesn’t break any rules yet.
Targets for wave 3
Wave 3 is at least equal to wave 1, except for a Triangle. If wave 3 is the longest wave it will tend to be 161% of wave 1 or even 261%.
Targets for wave 4
Wave 4 retraces at least 23% of wave 3 but more often reaches a 38.2% retracement. It normally reaches the territory of sub wave 4 of the previous 3rd wave.
In very strong markets wave 4 should only retrace 14% of wave 3.
Targets for wave 5
Wave 5 normally is equal to wave 1, or travels a distance of 61.8% of the length of wave 1. It could also have the same relationships to wave 3 or it could travel 61.8% of the net length of wave 1 and 3 together. If wave 5 is the extended wave it mostly will be 161.8% of wave 3 or 161.8% of the net length of wave 1 and 3 together.
Targets for wave A
After a Triangle in a fifth wave, wave A retraces to wave 2 of the Triangle of previous wave 5. When wave A is part of a Triangle, B or 4 it often retraces 38.2% of the complete previous 5 wave (so not only the fifth of the fifth) into the territory of the previous 4th wave. In a Zigzag it often retraces 61.8% of the fifth wave.
Targets for wave B
In a Zigzag, wave B mostly retraces 38.2% or 61.8% of wave A. In a Flat, it is approximately equal to wave A. In an Expanded Flat, it usually will travel a distance of 138.2% of wave A.
Targets for wave C
Wave C has a length of at least 61.8% of wave A. It could be shorter in which case it normally is a failure, which foretells an acceleration in the opposite direction.
Generally wave C is equal to wave A or travels a distance of 161.8% of wave A.
Wave C often reaches 161.8% of the length of wave A in an Expanded Flat.
In a contracting Triangle wave C often is 61.8% of wave A.
Targets for wave D
In a contracting Triangle wave D often travels 61.8% of wave B.
Targets for wave E
In a contracting Triangle wave E often travels 61.8% of wave C. It cannot be longer than wave C!
Targets for wave X
Wave X minimally retraces 38.2% of the previous A-B-C correction; a retracement of 61.8% is also common.