Before considering rollback rules, I will tell you basic information about price patterns in “Mastery of analysis” Glenna Neely and their Structural Designations. Mastering wave analysis will help you with multilateral technical analysis, which will help you in stock trading, trading in foreign exchange and stock markets.
Basic information about polywaves and their structure
Price patterns are structural series of monowaves, which are divided into two basic types: impulses and corrections. Those, who read my articles on Elliott Wave Analysis Theory, already familiar with these concepts.
In NeoWave theory, pulses obey the following rules:
- The figure consists of five adjacent segments, which are marked with numbers from 1 to 5 and satisfy the requirements of a trend or terminal price figure. I will note, that the price figure is considered a trend, whose price projections of waves 2 and 4 do not overlap, and terminal – figure, whose projections of waves 2 and 4 overlap. I will tell you more about this in the process of considering the overlap rule.
- Three of these segments should develop in the same direction.
- Second segment (wave) formed in the opposite direction with respect to the first, but the level of its starting point is not reached.
- The third segment should exceed the second in price length and cannot be the shortest among 1, 3 and 5 waves.
- The fifth segment is almost always longer than the fourth and can never be less than 38,2% the fourth. If its amplitude is between 38,2% up to 100% (not including 100%) fourth wavelengths, then such a fifth segment is called failed.
BTCUSD chart shows momentum. The beginning and end of each wave are marked with red circles, and in the vicinity of the endpoints are segment numbers.
Remind you, that one of the momentum waves (1, 3 or 5) is stretched, that is, it has a longer length and more complex structure than the rest. In our example stretched, apparently, is the fifth wave.
Price projections of waves 2 and 4 partially overlap (blue and green areas), which means, the price figure in question should be considered terminal.
If at least one of the listed rules is not satisfied, then the analyzed activity is considered corrective. Respectively, corrections are price figures, arising between pulses. They can be simple and complex. A simple correction consists of three or five monowaves, denoted by letters of the latin alphabet from a to e. Complex corrections, in turn, consist of a few simple, which are connected by peculiar bundles – x-waves.
There are three basic types of simple corrections:
Flat. These are figures, which can be placed between two horizontal lines, passing between the minimum and maximum points of wave a. In the standard plane, the remaining waves will not break through these levels. Slight penetration is possible only in the case of strong (longer) the waves.
The graph shows an example of a plane, which is placed between the horizontal pink lines, passing through the minimum and maximum points of the wave a. The start and end points of the segments are marked with red filled circles, and in the vicinity of the end points, lettering of the waves is added.
Zigzags. Also consist of three waves, but differ in more intense price movements.
With a decrease in the scale of the past graph, we can see, as reviewed last correction is preceded by a zigzag (for ease of perception at first, I left the basic notation for waves of simple shapes with the letters a, b, c). Both figures are connected by an x-wave, which in some cases may not be so explicit, as in the example, and hide in one of the monowaves.
Triangles. These corrective shapes can be placed between converging or diverging lines. Lines are built on the so-called touch points, which can be any 4 of 6 points of maximum and minimum segments.
The graph shows an example of a triangle. note, that in this case, the start point of wave a and the end point of wave e are outside the region, between convergent lines. In the first case, the start point of wave a is not a priority for constructing the boundaries of a triangle. And in the second, the so-called breakthrough of boundaries by the wave e.
There are many varieties of triangles: tapering, expanding, limiting, non-limiting, horizontal, wrong, movable. We’ll talk about them in detail after considering rollback rules.
Before considering the following rollback rules, it is worth considering structural designations in more detail, some of which you could already observe when studying condition a of Rule 1. One of their components, a lot of questions are called position indicators – letter characters «c», «F», «L» and t. d., preceding more understandable to traders, familiar with the Elliott Wave Theory, triples («:3») and «fives» («:5»).
There are two types of structural designations:
- basic – without position indicator, eg, «:5»;
- positioned – with position indicator, eg, «:F3» or «:s5».
If the wave under study contains a structural list, consisting of several structural symbols, then Position indicators will help determine the choice among possible alternatives and reduce it to a single designation. After that, how the waves on the graph will contain only one structural designation, they can be used to determine the starting and ending points of price figures.
Structural designation Neely suggests dividing among themselves in two ways – using «-» and «++». A hyphen is used to separate parts of the same standard price figure, and two pluses – to separate two standard price figures and x-waves, arising between them, in complex corrections.
Basic structural notation
This abbreviation may mean «troika» – any correctional wave in the zigzag, flat, the triangle, when its exact position in the sequence is not known.
«:3» ( underlined)
This is the so-called last three in the complex correction – end segment of complex correction (zigzag, plane, triangle). If a complex correction includes a triangle, then in most cases it will be the last three.
Structural designation «:5» symbolizes any impulse wave, which does not complete the Elliott price figure. «Five» may be the first wave of the impulse or zigzag or the middle phase of the impulse or complex correction.
In the process of analyzing the first five configurations, remember, that the wavelength following it should be more than 61,8% its length, after which the intersection of the level of the final point of the five must necessarily occur. If this condition is not met and «:5» is not the only designation in the structural list of the investigated wave, then it should be crossed out.
Structural Symbol Definitions with Position Indicators.
Structural designation «:F3» represents the first three (First 3). Three will be called figures, which consist of three segments, eg, zigzags or planes. He marks the waves or making up the first segment of complex correction, either arising between two impulse fives. If the first two triples are formed one after another, then with the second of them begins a new figure of a smaller size. During the analysis, circle the starting points of both «:F3», but do not combine them until, while the second «:F3» won’t be part of the polywave, including going for the second «:F3» the waves.
This designation marks the central triples (Center 3). The waves, near which stands such an abbreviation, cannot be the start or end segment of a sequence, so after them, usually, no significant price changes.
In turn, if one of the designations of the first or last wave of the group is «:c3», then it can be safely excluded from the structural list. If «:c3» occurs in the sequence of one of the simple price figures, then the starting point of the wave «:F3» should circle.
This abbreviation stands for, as «center three in x-wave position». A wave with this designation cannot be the start or end segment of a sequence. therefore, when after «x:c3» sharp and big enough, relative to surrounding price activity, traffic, in almost all cases it is a wave of a non-bounding triangle.
«x:c3» form between two standard (simple) Elliott Price Figures. As I said above, its function is to combine simple corrections into more complex, large configurations. Therefore if «x:c3» occurs as an alternative designation of the first or last wave of the sequence being studied, it can be safely deleted from the structural list.
The analysis should also consider, that wave «x:c3», except in rare cases, in its structure it cannot be more complicated than the previous and following standard price figures.
So-called «penultimate three». A wave with such a designation cannot be the first, no end segment of the price figure. Moreover, following the wave with the designation «:sL3» always follows a wave, in the structural list of which there is «:L3». Structural designation group «:sL3» – «:L3» can occur only in the case of the formation of a triangle or terminal figure.
This structural designation stands out «last three». She can follow, both «:sL3», so for «:c3».
If «:L3» is the shortest wave of the group, then the level of its starting point (plus one unit of time – a week, day, hour, depending on the timeframe used) should be achieved in a time not exceeding the duration of its formation. Also, as well «:sL3», «:L3» is part of a triangle or terminal price pattern. I.e, if in the investigated figure all the above-described rules for constructing the impulse are fulfilled, then we will talk about momentum, and if any of them is not satisfied, then about the triangle.
Taking a case with a triangle, discussed above, add structural notation to each of its segments. Wave a is the first three (:F3), midwaves – central triples (:c3), followed by the penultimate three (:sL3) and the last three (:L3).
Abbreviation «:s5» stands for, how special (unusual) five. A wave with this designation is usually part of the complex Elliott configuration, and in rarer cases – the third segment of the trend impulse with a stretched or failed fifth. If «:s5» is the only designation in the structure list, then it must be combined with the structural notation of the previous waves. Only two variants of sequences of previous waves are allowed: «:5 – F3» and «F3 – c3».
This abbreviation is placed near «last five» – the waves, which completes one or more larger Elliott price figures. The minimum requirement for confirmation of such a wave is the intersection of the trend line, connecting the end points of the waves m(-2) and m0, which should happen during a time period, not exceeding the duration of wave formation with the designation «:L5» (plus one unit of time).
Remind you, that in accordance with the rule of relative positioning of waves, test monofilament is marked, like m1. The waves preceding it are successively assigned the notation m0, m(-1), m(-2) and t.d. And following the waves – m2, m3 and t.d.
Wave with designation «:L5» must be preceded by a wave with the designation «:F3» or «:c3», If the analysis reveals, that it is preceded by an impulse (:L5, :s5 or :5), then the endpoints of both of these waves (:L5 and momentum) should circle.
On the graph, wave m1 is the last five. Verify the fulfillment of the mandatory condition for confirming this fact. draw a green line, connecting endpoints m(-2) and m0, and visually compare the time interval for the formation of m1 (green area) with the time the trend line crosses, starting at endpoint m1. As you see, trend line crosses over a shorter period. Moreover, in our case «:L5» preceded «:c3» and «:F3».