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Elliott Waves are a form of technical analysis, but they are not a technical indicator (in the sense of the CCI, etc.). Elliott Waves are a method of analysing bar or candlestick charts to determine the direction (and to some extent the distance) that a market is expected to move next.
A complete description of Elliott Waves is available in my definition of Elliott Waves, and includes information about the different types of waves, the number of waves that are required, and the relationship between Elliott Waves and the Fibonacci numbers.
Elliott Waves are defined using several analysis criteria such as the relationship between waves, the location of each wave within the larger waves, and the volume that is included in each wave. The analysis criteria are flexible, meaning the criteria are not absolute, and their use and interpretation will vary from one Elliott Waves trader to another.
Primary Wave - The primary wave is the wave that is in agreement with the overall direction of the market (i.e. an upward wave in a bullish market, and a downward wave in a bearish market), and consists of five smaller waves that are defined as follows: Wave # 1 - The first wave of a new primary wave is often very difficult to recognize in advance, but much easier to recognize in hindsight. There are no particular location or size requirements for the first wave, but once the wave has been recognized, it should be significant enough to be the start of a new primary wave (e.g. perhaps moving past a previous low). Wave # 2 - The second wave of a primary move is a corrective wave (i.e. its direction is against the direction of the primary wave). The second wave should pull back into the first wave, to approximately the 61.8% Fibonacci retracement level, and should never exceed the high (for a bearish primary wave) or the low (for a bullish primary wave) of the first wave. The volume of the second wave should be lower than the volume of the first wave. Wave # 3 - The third wave of a primary wave is in agreement with the direction of the primary wave, and is often the largest wave of the primary wave. The third wave should exceed the high (for a bullish primary wave) or the low (for a bearish primary wave) of the first wave, and should move to approximately the 161.8% Fibonacci extension level. The volume of the third wave should be higher than the previous two waves, and is often (but not necessarily) the highest volume wave of the primary wave. Wave # 4 - The fourth wave of a primary wave is the second corrective wave of the primary wave (wave # 2 being the first). The fourth wave should pull back into the third wave, to approximately the 31.2% to 61.8% Fibonacci retracement levels, and should never exceed the high (for a bearish primary wave) or the low (for a bullish primary wave) of the second wave. The volume of the fourth wave should be lower than the volume of the third wave. Wave # 5 - The fifth and final wave of a primary wave is in agreement with the direction of the primary wave, and has the potential to be the largest wave of the primary wave (wave # 3 being the other potentially largest wave), but can also be one of the smallest waves of the primary wave. The fifth wave should exceed the high (for a bullish primary wave) or the low (for a bearish primary wave), but the volume of the fifth wave can be either higher or lower than the volume of the third wave.Secondary Wave - The secondary wave is the wave that is against the overall direction of the market (i.e. a downward wave in a bullish market, and an upward wave in a bearish market), and consists of three smaller waves that are defined as follows: Wave # 1 - The first wave of a secondary wave is often very difficult to recognize in advance because it can easily be confused with another corrective wave (i.e. the sixth wave) of a primary wave. The first wave should pull back into the fifth wave of the previous primary wave, and while there are no particular size requirements for the first wave, it is preferred if the first wave reaches the 31.2% to 61.8% Fibonacci retracement levels. Wave # 2 - The second wave of a secondary wave is a corrective wave (i.e. its direction is against the direction of the secondary wave). The second wave should pull back into the first wave, but should never exceed the high (for a bearish secondary wave) or the low (for a bullish secondary wave) of the first wave. The volume of the second wave should be lower than the volume of the first wave. Wave # 3 - The third and final wave of a secondary wave is in agreement with the direction of the secondary wave. The third wave has the potential to be the largest wave of the secondary wave. The third wave should exceed the high (for a bullish secondary wave) or the low (for a bearish secondary wave) of the first wave, and should move to approximately the 161.8% Fibonacci extension level. The volume of the third wave should be higher than the volume of the first two waves.The example chart is a bar chart with the primary (bearish) wave shown by the yellow line, and the secondary (bullish) wave shown by the blue line.
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