The Elliott Wave Theory is a technical analysis tool used to analyze financial market cycles by identifying repeated wave patterns influenced by investor psychology.
In ICT (Inner Circle Trader) trading, the Elliott Wave Theory is harmonized with ICT concepts such as market structure, order blocks, and liquidity to predict price movements with precision.
This guide explores how Elliott Wave Theory integrates with ICT strategies, providing actionable insights with examples.
1. What Is Elliott Wave Theory?
Developed by Ralph Nelson Elliott in the 1930s, this theory suggests that markets move in repetitive waves influenced by collective investor behavior.
The theory divides these waves into two categories:
1. Impulse Waves (Trends):
Move in the direction of the overall trend, typically consisting of 5 sub-waves.
- Waves 1, 3, and 5: Trend-following.
- Waves 2 and 4: Corrective pullbacks.
2. Corrective Waves:
Move against the overall trend, usually consisting of 3 sub-waves (A, B, and C).
2. Elliott Wave Principles in ICT
ICT traders utilize Elliott Wave Theory to confirm institutional movements, align trades with the dominant trend, and identify potential reversals.
Key principles include:
- Wave 1: Often originates after institutional accumulation or distribution phases.
- Wave 3: Considered the strongest wave, often aligning with significant liquidity sweeps or fair value gaps (FVGs).
- Wave 5: Marks the exhaustion of a trend and a potential liquidity trap.
- Corrective Waves: Used to locate order blocks for re-entries.
3. Using Elliott Wave Theory in ICT
1. Wave 1: Identifying the Initial Move
Wave 1 often forms after a liquidity sweep, signaling the start of a new trend.
Example:
- Scenario: GBP/USD sweeps liquidity at 1.2500, triggering a bullish move.
- Action: Enter after a bullish order block forms during Wave 1.
2. Wave 3: Riding the Strongest Trend
Wave 3 aligns with the market’s strong trend move, supported by institutional order flow and liquidity targeting.
Example:
- Scenario: EUR/USD forms a fair value gap between 1.1050–1.1070 during Wave 2 retracement.
- Action: Enter long during the retracement, targeting Wave 3’s expansion to the next liquidity pool at 1.1150.
3. Wave 5: Preparing for Reversal
Wave 5 often marks exhaustion and can coincide with smart money liquidity traps.
Example:
- Scenario: USD/JPY completes Wave 5 at 145.00, a significant resistance level with visible liquidity.
- Action: Look for reversal patterns or short entries near this level.
4. Corrective Waves in ICT
Corrective waves (A-B-C) provide re-entry opportunities within the dominant trend.
ICT concepts like fair value gaps and order blocks are key during these phases.
Example:
- Scenario: During Wave A, AUD/USD retraces to an order block at 0.6750.
- Action: Enter long at 0.6750 during Wave C for a continuation move.
5. ICT Concepts Complementing Elliott Wave Theory
- Order Blocks:
- Used to identify potential entry points during corrective waves.
- Stops are placed beyond the order block.
- Liquidity Pools:
- Elliott waves frequently target liquidity levels.
- Align Wave 3 or Wave 5 trades with these levels for higher probability trades.
- Fair Value Gaps (FVGs):
- FVGs often form during impulsive waves.
- Use these gaps for entries during retracements.
6. Real-World Example: Elliott Wave and ICT in Practice
1. Scenario:
- Currency Pair: EUR/USD.
- Initial Move: Wave 1 begins at 1.0900 after a liquidity sweep.
- Wave 2: Retraces to 1.0950, filling a fair value gap.
- Wave 3: Expands upward to 1.1100, breaking market structure.
- Wave 4: Retraces to 1.1050, testing an order block.
- Wave 5: Completes at 1.1150, targeting a liquidity pool.
2. Trade Setup:
- Wave 1: Enter long after the bullish order block forms.
- Wave 2: Add positions at the fair value gap.
- Wave 3: Hold positions and exit near the liquidity pool at 1.1100.
7. Common Mistakes to Avoid
- Ignoring Market Structure: Always align wave counts with ICT market structure principles.
- Premature Entries: Wait for confirmation through order blocks or liquidity sweeps.
- Overlooking Institutional Bias: Ensure the Elliott wave aligns with the institutional trend.
8. Conclusion
Elliott Wave Theory, when combined with ICT concepts, becomes a powerful tool for predicting market movements.
By aligning impulsive and corrective waves with ICT elements like order blocks, fair value gaps, and liquidity pools, traders can refine their entries, exits, and overall trading strategies.
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