Forex Academy: Principle Of Alternation in Elliott Waves Theory
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4/4

The very notion of alternation comes from the Elliott Waves Theory and it is referring to the corrective waves. In times, Elliott found that corrective waves, namely the 2nd and the 4th waves in any impulsive move, or motive wave, or five waves structure, are alternating in different waves, and this is mandatory for the move to be considered a valid impulsive move.

Types of Alterations

The alternation can be in multiple ways, but at least one is mandatory: time, structure, construction, distance.

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Of course, time is referring to the amount of time it took market to consolidate for the second and the 4ht wave and the time taken should e different. The same is on structure: if the second wave, for example, is a complex corrective wave, like a double combination or a triple combination or a double zigzag, etc, then for the 4th wave the trader should look for a simple corrective wave, like a simple triangle, or flat, or zigzag.

Construction is somehow similar with the structure, only that here one should look at the number of sub-divisions each correction has, while the distance refers to the actual/physical distance price is traveling from the beginning of the corrective wave until the end of it.

Impulsive Waves are Not Supposed to Channel

It is said that an impulsive move is not channel or at least it is not supposed to channel. This is the very simple definition of alternation for the two corrective waves within the Elliott Waves Theory.

If you are seeing a move, regardless if it is a bullish or a bearish one, that is channeling, then that is not impulsive move. It is most likely a corrective wave, a zigzag or a zigzag family pattern, but not an impulsive move.

Using The Principle of Alteration

In order for the principle of alternation to be respected, traders need first of all to draw the 0-2 trend line, that is, a trend line that is stretching from the beginning of the impulsive move all the way until the end of the second wave.

Of course, it means the end of the second wave is known and this is the very minimum time one should wait for the analysis to be made. The next thing to do is to copy the 0-2 trend line and paste it and projected it forward from the end of wave 1.

This gives a channel that is forming and if you are to have an impulsive move that respects the principle of alternation then the upper side of the channel should be broken and market should travel with the third wave of the impulsive move way above that trend line, if the impulsive move is a bullish one, or below it, if the impulsive move is a bearish-one of course.

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The second and the fourth waves should be very different and one should be suspicious if they are not. The things to look for should be anywhere from the structure of the two waves to the distance price is travelling and the sub-segments the two waves have.

Be Mindful of the Time Frame

Time is really important as well as if you are seeing a second wave that is really taking a lot of time to consolidate then it is not the same to be expected for the 4th wave. In this case, it means that the 4th wave would be most likely a simple correction and the way to trade is to take a Fibonacci retracement tool and wait for market to retrace 23.6% or 38.2% as this is giving us the perfect striking price for a simple fourth wave to be followed by the fifth wave.

It is important to remember that that principle of alternation or the alternation rule is to be looked only for the two corrective waves and not for the impulsive moves, so it has nothing to do with waves 1, 3 and 5.

In reality it has much to do as the impulsive move is characterized by one wave that is bigger than the other two and this means it is extended. Depending on which wave extends, different consolidation times are expected for the two corrective waves and the alternation principle is offering us tools for trading in the right direction and from the right trade price.

If there is a first wave extension impulsive move, then the 2nd wave is most of the times the most time consuming so taking the time taken for it (counting the candles) and projecting that time by the moment the 3rd wave ends is giving us the maximum time it should take for the 4th wave to form.

This opens the gates to a strategy called scaling into a position but this time the scaling is not being done price-wise, but time-wise. In a bullish impulsive move, BUY contracts/ CALL options should be traded and in a bearish one SELL/PUT options of course.avatrade

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