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The Wave Principle identifies the direction of the dominant trend. A five-wave advance or progress identifies the overall trend as up. Conversely, a five-wave decline determines that the larger trend is down. Why is this information important? Because it is easier to trade in the direction of the dominant trend, since it is the path of least resistance and undoubtedly explains the saying, “the trend is your friend.

The Wave Principle also identifies countertrend moves. The three-wave pattern is a corrective move or regression to the preceding impulse or progressive wave in either direction. Knowing that a recent move in price is merely a correction within a larger trending market is especially important for traders because corrections or regressive moves are opportunities for traders to position themselves in the direction of the larger trend or progressive move of the market.

As Elliott observed, wave patterns keep repeating themselves at various degrees of the trend This repetition in form means that price activity is fractal in nature. Wave (1) subdivides into five small waves, which is the part of a larger five-wave pattern. Trader can recognise end of the trend If he can know the end of the lower degree waves which is a five wave progressive move. Progress can be upside or downside.

Ralph Nelson Elliott stated that the Fibonacci sequence was the mathematical basis for the Wave Principle. All waves be it impulsive or corrective adhere to specific Fibonacci proportions For example, common objectives for wave 3 are 1.618 and 2.618 multiples of wave 1. In leading diagonals as wave 1, wave 3 at times travel upto 423%. In corrections, wave 2 typically ends near the .618 retracement of wave 1, and wave 4 often tests the .382 retracement of wave 3. These high-confidence price targets allow traders to set profittaking objectives or identify regions where the next turn in prices might occur.

At what point does a trade may go wrong? Wave Principle answers this question– in the form of Elliott wave rules.
Rule 1: Wave 2 can never retrace more than 100% of wave 1.
Rule 2: Wave 4 may never end in the price territory of wave 1.
Rule 3: Out of the three impulse waves — 1, 3 and 5 — wave 3 can never be the shortest.
A violation of one or more of these rules implies that the present wave count is incorrect & trader has to keep alternative count ready which should become next preferred primary count.