Elliott Wave Analysis System Development
Elliott Wave Theory is one of the most complex technical analysis methodologies to algorithmically implement. Markets move in 5-wave impulses and 3-wave corrections nested at different timeframes. Automatic wave structure recognition requires combining algorithmic analysis with statistical methods.
Basic Theory and Rules
Impulse (5 waves, labeled 1-2-3-4-5):
- Wave 2 cannot retrace more than 100% of wave 1
- Wave 3 cannot be the smallest of waves 1, 3, 5
- Wave 4 cannot overlap price range of wave 1
Correction (3 waves, labeled A-B-C):
- Simple: Zigzag (5-3-5), Flat (3-3-5), Triangle (3-3-3-3-3)
- Complex: Double/Triple Three
Fibonacci Ratios for Waves:
- Wave 3 typically 161.8% of wave 1
- Wave 5 often equals wave 1 or 61.8% of waves 1–3
- Wave 2 retraces 38.2%–61.8% of wave 1
- Wave 4 retraces 23.6%–38.2% of wave 3
Wave Labeling Algorithm
Stage 1: Finding Basic Pivot Points
Use ZigZag indicator with configurable threshold (e.g., 5% minimum move). Each ZigZag peak and trough — potential wave boundary.
Stage 2: Recursive Search for Wave Structures
For each potential 5-wave structure validate Elliott rules, calculate Fibonacci ratios, and check channel alignment.
Stage 3: Scoring and Selecting Best Labeling
Each potential labeling receives score based on:
- Compliance with Elliott rules
- Wave ratio proximity to Fibonacci numbers
- Channel analysis (waves 1-3-5 along one line)
- Alternation of waves 2 and 4
Stage 4: Current Position Forecast
After labeling completed waves, system determines current market position and projects targets for next wave using Fibonacci extensions.
Multi-Timeframe Analysis
Elliott Waves are fractal: each wave consists of smaller-scale waves. System operates simultaneously on multiple timeframes, with larger timeframe labeling providing context for smaller.
Practical Trading Signals
System generates signals at specific situations:
- End of wave 4: entry in trend direction before wave 5
- End of wave 5: potential reversal, start of A-B-C correction
- End of wave C: correction completion, return to trend
Each signal includes entry zone, stop-loss, target and scenario probability.
Technical Stack
Backend: Python with Elliott wave analysis implementation, pandas for OHLCV operations, scipy for optimization.
Storage: PostgreSQL for wave structures, projections, and alerts.
Visualization: TradingView Lightweight Charts with SVG overlays for wave labels and channels.
Alerts: Telegram notifications when waves complete with signal details including probability percentages.
We develop a complete system with automatic labeling, multiple scenarios, invalidation levels and backtesting module for algorithm accuracy assessment.