20 min

The ultimate guide on Elliott waves in crypto trading

In this article we will consider the practice on implementing Elliott waves in your crypto trading.

Most of you have probably heard about Elliott waves and we are sure that you don’t use it in cryptocurrency trading strategy because it’s very complicated and subjective approach. Crypto trading for beginners is very challenging and stressful even without Elliott waves. To be honest when we first time tried to implement it to my crypto trading strategies it was a complete disappointment. We were sure that it does not suit for both trading bot and manual trades. Elliott waves were thrown into a garbage bin for almost two years and we developed our crypto trading algorithm using only linear programming approaches.

While we have been trying to invent the best automated trading bot using only indicators and support and resistance levels, best crypto traders have been successfully using Elliott waves in their analysis. Finally we make a decision to have a deep dive in this popular crypto trading tool and studied in details all available literature. As a result we found that Elliott waves will ruin your trading if you use it without special indicators for confirmation. Now we have 2 years of experience in trading with waves and almost one year ago we implemented them into our algorithmic trading bot. Today we prepared the best ultimate guide ever on Elliott waves using best practices and our unique experience how to use them in developing your own profitable crypto trading strategies. Let’s go!

Why it’s vital to use Elliott waves?

Before answer this question, let me ask another one! Why is important to use map to reach the final destination? I think here is the obvious answer! Talking about Elliott waves it’s almost the same reason. This is the only one approach which gives you a map for a price chart. I think you agree that technical indicators or support and resistance levels will not give you the answer which direction the price will choose. When you have, for example Stochastic Oscillator crossover or RSI oversold area hit you just open long because this is the most common strategy. You buy asset like a blind kitten. We are not criticize this approach, because using proper risk and money management you will earn with almost every strategy, but understanding the Elliott waves concept will dramatically increase your profit even if you combine them with your ordinary strategy. Why it’s happening? The answer is easy, because Elliott waves in the underlying structure of the market. You will be aware when you shall use your signals and when it’s better to skip trade. Now let’s dive into the Elliott waves to understand how to find them on the price chart. In the first part we will give you all needed theory and after that we will show in the real charts how it works.

Elliott waves
Chart 1. Elliott waves.

In general, Elliott waves concept is pretty easy. All markets are globally moving up with the five waves formations and then show the pullback with at the reactive waves. On the Bitcoin price chart above you can see the most common picture for Elliott waves. We had the bull run which consists of five waves and then was the bear market represented with the ABC correction. 
Waves can be divided into two groups: impulsive and reactive. On the bullish phase waves 1, 3 and 5 are impulsive,  2 and 4 reactive. Impulsive waves consists also with five sub waves, while reactive have usually three waves (exception the triangle correction, will be covered later). On the bearish phase we have the opposite situation: waves A and C are impulsive, while wave B is reactive. Now let’s discuss each wave in details. 

What will stop every wave in 90% of cases?

Before we will observe the wave it’s very important to understand what are the early signs that current wave is about to be finished. This is really crucial concept because without it almost impossible to use Elliott waves for profitable trading. We need four tools to make sure that our counting is correct. In this article we will not spend to much time for these indicators, we just show you in practice how to use them. These tools are: Awesome Oscillator, Market Facilitation Index (MFI), Fibonacci retracement and extension and Fractals. These four indicators produce five wave’s end conditions.

  1. Divergence with Awesome Oscillator. If you found five sub waves inside any wave and you can see that price set the higher high (or lower low for bearish case), while AO set lower high (or higher low) it’s divergence between wave 3 and 5. This is the most powerful signal that trend is over.
  2. Fractal at the top or bottom. When you see the divergence it’s just the first sign of trend weakness, we need confirmation with the fractal forming at the top or bottom. You can easily find this indicator in TradingView, it will show you all fractals.
  3. MFI squat bar. We will cover MFI in one of the next educational articles, now you just need to know that it has squat state - the last battle between bulls and bears. One of the three top bars will be the squat in 80% of waves end. You can also find this indicator in TradingView. 
  4. AO momentum change. Another one confirmation that trend is over is when AO histogram changes color. It’s better to wait three consecutive columns of the other color or when AO will cross back the signal line, 5 period MA of the AO. 
  5. Target area. Using Fibonacci extension and retracement we can find the area where the reversal is the most likely. We will show you this targets when talking about waves.

Now you know the five basic rules and we are ready to discuss every wave using this concept.

Wave 1

When the previous trend is over the impulsive wave 1 begins. We can define the wave 1 start only establishing the previous wave end. It could be wave 5, C or E. It does not matter. You just need to apply our five rules: divergence, momentum change, target area, squat bar and fractal. On the chart you can see how in theory wave 1 can be looks like.

Chart 2. Wave 1 theory.

Wave 1 always consists of five waves. That’s why we can wait for the same five rules to complete between wave 3 and 5 inside the wave 1. When you anticipate the wave 1 finish you have two options: close trade and re-enter at the wave 2 bottom or hold for the entire cycle. 

Wave 2

When wave 1 ends, you will see pull back in wave 2. It’s important to catch wave 2 bottom because wave 3 will bring you a lot of profit. Wave 2 can be classical ABC zigzag, flat or irregular correction. 70% probability it will be ended inside 0.38 and 0.62 Fibonacci retracement range of wave 1, in rare cases it can ends higher or lower. That’s why it’s better t count waves inside wave 2 and do not miss when all five trend killing conditions are met in wave C inside 2. 

Chart 3. Wave 2 theory.
Wave 3

The most impulsive wave in the entire cycle is obligatory for trading. Here you can have the less risky and the most easy trading. Wave 3 has the great fundamental factors as a price drivers. For example, Bitcoin spot ETF triggered a huge pump recently. Let’s imagine you correctly entered at the wave 2 end. Now we have to define wave 3 targets. The target area using fibonacci extension can be found between 1 and 1.61. This is the most likely case. In crypto it’s very often when waves 3 are extended. 

Chart 4. Wave 3 theory.

To have the most precise target it’s highly recommended to count waves inside wave 3. Found five waves? Check our favorite trend killing rules to exit a trade at the top. We know it sounds fantastic, but we managed to buy the exact bottom and sell at the top many times, but to be honest, we have never caught the top of the extended wave 3. Need more experience for that. 

Wave 4

Wave 4 can be the most complicated because it has a lot of different variants: zigzag, flat, irregular or even triangle. But at the same time in wave 4 we can have the easiest setup. When you predicted wave 3 top, it’s time to setup the target for the wave 4. The most reliable one is between 0.38 and 0.5. This wave is not so rapid as wave 2 and takes much more time (up to 70% of all cycle).

Chart 5. Wave 4 theory.

The very important tip here is to look at the price where wave 4 inside wave 3 has been ended. If this level coincides with the 0.38-0.5 zone it can give you much more confidence. We have never made a mistake using this technique. As usual you have to look for the five trend killing rules in wave C inside wave 4 as well. 

Another one thing we want to point out. You know the axiom, that wave 4 has not overlap wave 1 top. This rule can be slightly violated and we will show you the case. Don’t pay attention that much to this rule. 

Wave 5

Finally we are in wave 5. This is really vital to define it’s top because bear market will follow this wave and can destroy your deposits. The target area for the wave 5 is defined as the distance between wave 1 bottom and wave 3 top, measured from wave 4 bottom. Area between 0.61 of this distance and 1 Fibonacci level is our target. There you have to find trend killing rules as usual but this time for all cycle, not subwaves. 

Chart 6. Wave 5 theory.

The most dangerous place for trading is the correction. From our experience only wave C in zigzag is tradable. You would better to skip corrections and try to catch it’s end. We have four types of corrections, but the most important knowledges is that wave C and E are always consists  of five waves. It means you can use the rules how to catch wave 5 end inside these waves. 

  1. Zigzag ABC. If wave A consists of 5 waves the most like we will see zigzag. Wait when wave B reach 0.5-0.61 Fibonacci of wave A and be ready to trade in wave C.
  2. Flat. Wave A has 5 waves inside. Waves A, B and C are almost equal to each other. 
  3. Irregular. Wave B top is higher that the previous impulsive wave. Wave A consists of 3 waves.
  4. Triangle. Consists of A, B, C, D and E waves. Wave E consists of five waves. Usually occurs inside waves 4 and B of higher degree. 
Chart 7. Corrections.

Now you have a theoretical description. It’s time to trade!

Example 1. Bitcoin pre-FTX crash price action. October - November 2022 

Let's take a look at this Bitcoin price chart. First of all we need to count waves at 100-140 bars range. Let's follow the price now! Wave 1 was an impulsive and after that wave 2 retraced approximately to 0.61 Fibonacci. Then we saw wave 3 inside target area between 1 and 1.61. It was not extended, but set the highest value on AO. Then price fell in wave 4 to 0.38 Fibonacci. and AO crossed zero line. Moreover, price touched the wave 4 bottom of lower degree (inside wave 3). This is as we told above, the most reliable trade setup. Finally wave 5 set new higher high, while AO remains lower than the wave 3 top. Fractal at the top has been formed, AO momentum reversed. Time to go short! Just before FTX crash!

Chart 8. Bitcoin pre crush EW analysis.
Example 2. Bitcoin. FTX crash and depression. Nov - Dec 2022 

What has happened next? FTX crush and depression! Could it be predicted using this approach? Absolutely! After finish wave 5 before crush, we saw the first wave of crush. Wave 2 was very rapid, but has perfectly touched 0.61 Fibonacci. The wave 3 has the fundamental - FTX crush, magic, isn't it? This wave was extended and has almost reached 2.62 Fibonacci. Wave 4 reached exactly 0.38-0.5 area, nothing special. Triangle correction in wave 4 became the last wave 5. Look at AO, divergence and momentum change is on the place! Don't forget about the fractal.

Chart 9. Bitcoin FTX crush using EW.

Example 3. Bull run uploading. December 2022 - April 2023 

How current bull run has started? With the impulsive wave for sure! Waves 1 and 2 were depressive. Complete disbelief! Wave 2 reached 0.618 and started slowly going up, but finally this move accelerated and we saw maximum AO at the top. Then was the very good example of irregular correction. Look, it is a little bit deeper than flat and triangle from the previous two examples. From 0.61 level price bounced like a mad dog. We remember this move because we're able to catch wave 5. As we told you wave 4 end is the most reliable pattern to trade. Then classically we have seen divergence and momentum change at the wave 5 top.

Chart 10. Bitcoin bull market start.

Today we discussed the most important topic in crypto trading. We considered theoretical aspects of Elliott waves and demonstrated how to trade using them on practice. Now you can develop your trading strategy using this knowledges or enhance your automated crypto trading routine. You can even encode your personal automated trading bot if you have such skills. If you use grid trading bot on exchanges Elliott waves knowledge will also helps you to set up the range. We hope this article was useful for you. If you have questions ask us, will be happy to answer.

Best regards, 

Skyrex team

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