Log in

Elliott Wave Theory: the Extention Pattern

Adam Lienhard
Elliott Wave Theory: the Extention Pattern

Today we continue discussing the characteristics of impulse waves, specifically the 5th characteristic known as Extension.

What is the extension?

Most impulse waves have the Extension characteristic in only one of the three impulse waves that make up the pattern, which can be either Wave 1, Wave 3, or Wave 5.

The Extended pattern is characterized by having nine waves instead of the usual five waves in a regular impulse wave pattern. The extended impulse wave becomes Wave 1, followed by Wave 2 and Wave 3 as expected in a regular impulse wave pattern. Then comes the four-wave extension, followed by Wave 4 and Wave 5 as expected. 

The Extended pattern is characterized by the last three waves moving in the opposite direction of the first three waves, with Wave 5 ending at a higher level than the peak formed by Wave 3.

The meaning of the occurrence of wave extension in one of the three waves mentioned earlier, where the other two waves are equal in length.

For example, if wave extension occurs in Wave 1, this means that Wave 3 and 5 are equal in length and there will be no extension in them. We notice that the extension breaks the rule of wave strength in wave 3. If extension occurs within Wave 5, for example, then it will be longer than the very strong Wave 3, which is a strong indication of the direction of the price.

Unknown extension

In some cases, we cannot distinguish between the extension and the main waves present (1, 3, 5), and in this case, the harmonic waves are formed, and the extension is called an unknown extension.

The phenomenon of extension is very important. If an extension occurs in Wave 1 or 3, it is a warning that Wave 5 will be short. If an extension does not occur in Wave 1 and 3, it means that Wave 5 may experience an extension, and new price peaks will appear. Confirmation of the occurrence of extension can be done at that time with the help of the volumes indicator.

Usually, extension occurs in the third wave, which confirms the fact of the strength of Wave 3 and the absence of interference of Wave 4 with Wave 1.

Extension within the extension

There is another phenomenon that can occur, which is the phenomenon of extension within the extension. For example, this means that Wave 3 contains secondary waves (primary interference), and the third wave of these secondary waves also contains finer secondary waves (secondary interference).

In the natural sequence of waves, we find that Wave 3 surpasses Wave 1, and Wave 5 surpasses Wave 3, and this is considered a general rule (although not fundamental). But what if Wave 5 is unable to exceed Wave 3?

Elliott gave the name “failure of the fifth wave” to this situation, which was later called truncation or the fifth wave truncation. Truncation is characterized by Wave 5 being unable to exceed the previous peak of Wave 3, indicating the end of the main trend that started from Wave 1. Truncation can occur in any time frame, whether short-term or long-term.

It should be noted that the occurrence of truncation does not necessarily mean a reversal of the trend. It may be just a correction of the main trend that started from Wave 1. Therefore, the surrounding conditions of truncation should be analyzed, such as trading volume and other technical indicators, to determine the potential direction of prices in the future.

Truncation provides trading opportunities for traders who prefer to rely on Elliott wave analysis. Truncation can be used as an entry point for quick profits or as an exit point to get rid of previous positions and achieve profits.

It is also noted that truncation often occurs after a strong trend Wave 3 with a clear trend and a large price movement, as shown in the following figure:

Follow us on social media (Telegram, Instagram, Facebook) to get the Headway updates instantly.