Elliott Wave Theory relies on people being able to identify waves in the charts. There is no surprise there. However, there are three immutable rules that you must never forget when you are trading using the Elliott Wave Theory.

The Rules

Rule 1: The shortest impulse wave will NEVER be WAVE 3.

The odds are likely that Wave 3 will be the longest of the impulse waves, but it can definitely never be the shortest. If you are viewing a chart and believe that wave 3 is the shortest, then you are probably looking at something incorrectly.

Rule 2: WAVE 2 can NEVER go futher than the start of WAVE 1

Wave 2 is meant to be a corrective wave for Wave 1. It should have the currency pair drop-down some from the levels of Wave 1, but it should never extend beyond where Wave 1 went.

Rule 3: WAVE 4 will NEVER cross the same price zone as WAVE 1

Wave 4 is another corrective wave, and it must never cross the same price area as wave 1. If it does so, then there is a problem with how you are viewing the waves, and you have likely made a mistake in your calculations. That is nothing to be ashamed of, you just need to be aware that this is likely the case, and then move on to figuring out why it is the case.

Follow these rules when identifying Elliott Waves, and you will likely be well on your way towards becoming a successful trader.