*for mobile users, please view in landscape to see all portfolio information*
TrendLizard’s Elliott Wave Glossary of Terms
We go to great lengths to avoid using a lot of Elliott Wave terminology. Our whole game plan is to make this complex theory understandable and tradable for everyone. Nevertheless, when you inevitably run into terms you don’t understand, this glossary will be there to make sense of it.
Three-Wave Move A three-wave move is another name for a countertrend move that plays out in the opposite direction of the trend. You can quickly identify three-wave or countertrend moves on our charts because they are labeled with letters (A, B, and C). Three-wave moves are normally indecisive and move more sideways than up or down.
Five-Wave Move A five-wave move is another name for a trendy move that plays out in the same direction as the dominant underlying trend. Five-wave or trendy moves tend to be sharp and purposeful. You can quickly identify five-wave or trendy moves on our charts because they are labeled with numbers (1 through 5 – hence a five-wave move)
61.8% This ratio, also known as the Golden Ratio or Phi, is a governing force in nature as well as the stock market. It’s biggest importance to us is this; it is very uncommon for a countertrend move to retrace more than 61.8% of a trendy move. This provides a substantial piece of our risk management. May sound strange, but it works.
ABC Another name for a three-wave, corrective or countertrend pattern.
Alternation Wave 2 and Wave 4 of any impulsive wave tend to be different types of corrective waves. For example, if wave 2 is a flat correction, wave 4 will often be a zig-zag or triangle.
Apex Intersection of the two boundary lines of a triangle
Alternate Count Sometimes there is more than one way to apply an Elliott Wave labeling to a price chart. If that is the case, there will be a “preferred” count, which is the count the Elliott Wave analyst considers most likely, and an “alternate” count, which is less likely but still possible.
Corrective Another word for a countertrend move. Corrective moves normally play out in three waves, which are labeled ABC.
Count All the numbers and letters you see on our chart represent the Elliott Wave “count”. This is my best estimation of where that ETF is in its Elliott Wave pattern. The labeling can and will change as more price information becomes available. Another name for this is an Elliott Wave “labeling”.
Countertrend A move that, by nature, is moving against the direction of the dominant trend. Countertrend moves normally play out in three waves, which are labeled ABC. These moves frequently play out more sideways than up or down.
Channeling R.N.Elliott’s (yes, THAT Elliott) description of drawing parallel boundary lines within an impulse pattern to determine support and resistance levels for ongoing waves.
Diagonal Triangle (Ending) When a trendy price move is bigger than it probably should have been, it tends to run out of steam in its final up move. As a result, the final move ends up being a choppier move that is less dynamic and more indecisive than the normal trendy move.
Diagonal Triangle (Leading) Sometimes it takes time for a new trend to get going. When that is the case, we will often see the first move of a new trend turn into a leading diagonal. These moves are less purposeful than a normal trendy move, which makes them one of the trickier patterns to identify in real time.
Double Correction Sometimes one corrective pattern isn’t enough. Normally, after a three-wave (or countertrend) pattern completes, the underlying trend resumes. Sometimes, the trend is not yet ready to resume, and a second three-wave pattern will occur before the underlying trend resumes.
Elliott Wave This is the trading system we use to identify and trade the stock market’s strongest trends. Elliott Wave is based on the predictable nature of crowds, which is very applicable to the stock market. Due to the predictable nature of crowds, we can identify a repeating pattern in the price action of the ETFs we follow. You can learn more here.
Equality This is a tendency for the 1st and 5th wave of a trendy five-wave pattern to be equal in size, especially if the 3rd wave is longer than the 1st wave.
Expanded Correction Normally a corrective or countertrend pattern moves sideways or against the trend. Sometimes, the countertrend pattern will actually move momentarily in the direction of the underlying trend before reversing and continuing the countertrend move.
Extension This is where one of the moves in a trendy five-wave pattern becomes significantly larger than the other trendy moves within a five-wave pattern. It is most common for the 3rd wave of a five-wave pattern to extend, but it is possible for the 1st or 5th wave to extend as well.
Failure This occurs in the final (i.e. the 5th) wave of a trendy five-wave move. The 5th wave fails to move above the high set by the 3rd wave. This is also called a truncated 5th wave.
Fibonacci An Italian mathematician who discovered the “golden ratio” or “phi”. We dedicate an entire page to Fibonacci which you can access here. His work is the basis of our risk management, and it’s why we are able to keep our stop levels as close as we are.
Flat correction There are two main types of countertrend or corrective patterns. One of the types is a flat. This type of correction does just what you’d imagine – it moves sideways in a three-wave pattern. Once complete, the underlying trend resumes.
Fourth wave of a lesser degree Once a trendy five-wave pattern completes, there is a tendency for the proceeding countertrend pattern to find support at the 4th wave low of the trendy five-wave pattern.
Golden Ratio This is another term for the proportion 61.8%. For some reason, things are balanced at 61.8%, whether you are talking about a stock market pullback or the way the galaxies spiral.
Impulse Wave Another term for a trendy price move. Also called a five-wave move. These are the moves we want to find and trade because they are the moves that make up a trend. They are strong and purposeful. You can easily identify them on our charts because they are labeled with numbers (1 through 5).
Labeling All the numbers and letters you see on our chart represent the Elliott Wave “labeling”. This is my best estimation of where that ETF is in its Elliott Wave pattern. The labeling can and will change as more price information becomes available. Another name for this is an Elliott Wave “count”.
One-two, One-two Also called a series of 1st and 2nd waves, this is a slow start to a trendy move that is getting ready to explode higher.
Overlap In a trendy five-wave move, we don’t want to see the 4th wave move below the high set by the 1st wave. If it does move below the 1st wave high, it is called overlap, and it is a clue that suggests the move is NOT a trendy five-wave move and is instead a corrective three-wave move.
Pattern This is a general reference to the price action on an ETF we are analyzing. We are looking for two types of price patterns to determine the direction of the trend – trendy price patterns and countertrend price patterns.
Preferred Count Sometimes there is more than one way to apply an Elliott Wave labeling to a price chart. If that is the case, there will be a “preferred” count, which is the count the Elliott Wave analyst considers most likely, and an “alternate” count, which is less likely but still possible.
Running Flat This is another instance where a countertrend (or corrective) move can move in the direction of the underlying trend. This is why it’s possible for an ETF to set a new advance high, even when it has not yet completed the pullback yet.
Stop Level (aka stop loss level) It is an order placed with a broker to buy or sell once the stock reaches a certain price. A stop-loss is designed to limit an investor’s loss on a security position. Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%.
Third of a third This is in reference to what is frequently the strongest portion of a trend move. The 3rd wave of a five-wave move is notoriously the biggest and most purposeful part of a move, so this is the move we very much want to be in on when it begins.
Thrust This is the strong resumption of the trend following a countertrend triangle pattern.
Trend/Trendy move These are the reason we trade. Our entire purpose is to identify and trade the trendy moves that take place on every ETF we follow over time. Elliott Wave is the best way I have found to accomplish this.
Triangle This is a type of countertrend or corrective pattern that moves against the direction of the underlying trend. Triangles are pretty uncommon, but when they happen, price action normally contracts until it is ready to resume the uptrend. Triangles can also expand, but I can’t readily recall a single expanding triangle I have traded.
Truncated Fifth Wave This occurs in the final (i.e. the 5th) wave of a trendy five-wave move. The 5th wave fails to move above the high set by the 3rd wave. This is also called a failure.
Wave These are the price patterns we are trying to identify on the ETFs we trade. If a price pattern has five moves, we call it a five “wave” move, which is the basis of the Elliott Wave Theory.
Zigzag One of the two most common types of corrective or countertrend patterns. A zigzag is a sharper move in the opposite direction of the underlying trend. These moves can sometimes be confused as trendy moves because they are sharper. The difference between a trendy move and a zigzag is that a trendy move plays out in five waves while a zigzag plays out in three waves. Contrast this type of countertrend pattern with a Flat.