Fourth Wave:
When the strong third wave ends, profit-taking pressure begins to emerge. The most astute traders entered the market at the very beginning of the trend formation and now hold substantial profits. In nature, the fourth wave is distinctly different from the second wave. Elliott described the difference between them as the rule of alternation: if the second wave is simple, then the fourth wave will be complex, and vice versa. A simple correction usually refers to a zigzag pattern. If the second wave is simple, the fourth wave should exhibit a complex sideways correction (flat, irregular, triangle, double or triple three-wave correction).
Our research shows that approximately 85% of oscillating movements occur during the fourth wave. If you find it extremely difficult to determine your wave position, you are likely in the fourth wave. If you wake up and find yourself in the fourth wave, the best strategy is to go back to sleep.
The retracement percentage of the fourth wave differs significantly from that of the second wave. Generally, the fourth wave correction will drag on for a long time—often up to 70% of the entire five-wave sequence. The price retracement percentage of the fourth wave is usually smaller than that of the second wave. Again, the fourth wave comes from profit-taking pressure, not new entry pressure. We can usually observe significant declines in trading volume, price volatility, option premiums, and momentum indicators.
The retracement range of the fourth wave is typically between 38% and 50% of the third wave. Cases where the retracement is less than 38% account for only about one-sixth. When observing the development of the fourth wave, please keep in mind an iron rule: "The fourth wave will never fall below the top of the first wave." However, in actual trading, we can also find some exceptions.
To secure an ideal trading position for the fifth wave, it is necessary to analyze the fourth wave. At this point, Fibonacci coefficients can be adopted, and the C-wave within the fourth wave can be observed using a smaller time frame to verify the "Five Magic Bullets." During the analysis, it must be confirmed that the number of bars in the C-wave should be between 100 and 140. You can adjust the time frame of the chart to control the number of bars. Again, the Five Magic Bullets are:
1) Divergence in MFI;
2) Position within the target zone;
3) Fractal arrangement;
4) "Dormant" window;
5) Changes in momentum in the "Consistent Profit Method" MACD.