Swing Trading: The Elliott Wave and Market Mindset

Written by BTSE

September 30, 2021

Swing Trading: The Elliott Wave and Market Mindset

Swing trading can be better utilized by understanding how and where the Elliott Wave theory and market psychology come together.

Swing trading is a trading strategy that profits from market fluctuations going from the lows to the highs — and vice versa — of each price wave.

This strategy implies that you keep your orders and positions active for a period of time, sustaining anywhere from a few days to months. 

This trading strategy perfectly fits a well-established market theory — the Elliott Waves Theory — as well as market psychology, and it works also for crypto markets. 


What is Swing Trading?

Swing trading is a kind of technical analysis that takes its name from the highest and lowest points of price waves, called swings — high and low. 

This strategy implies that you go long at the swing low, and short at the swing high.


Elliott Wave Theory

The Elliott Wave Theory was born in 1938 when Ralph Nelson Elliott believed that market behavior was regulated by some kind of order, refuting what’s known as the random walk theory

Thanks to his experience in analyzing markets, Elliott discovered that markets move by following two major trends, one upward and one downward, and that both these trends are divided into minor waves: the upward trend is formed by five waves, the downward trend comprises three waves. 

Each main wave can be further divided into impulsive and corrective movements.

Impulses are those movements that follow the main trend and are usually formed of 5-wave subsets; corrective waves go against the trend, in sets of 3 sub-waves.

So, if we are in the uptrend phase of market cycles, impulse waves will go upwards and corrective waves downwards. On the contrary, in the downtrend phase, impulse waves will go downwards and corrective waves upwards.

With the downward movement often shorter than the upward one, markets are destined for continuous growth. 


How Market Psychology Works

Even if many traders consider the Elliott Wave theory too subjective, it is in reality based on market psychology. Markets are driven by people’s actions, and even the most professional traders can give in to feelings. With human emotions unchanged, markets tend to show the same behavior over time.

There are a few emotions to consider, and each of them corresponds to a different market wave. 

When a new trend begins, the most powerful emotion is mistrust: traders, recovering from an unfruitful market phase — often preceded by a negative trend — don’t trust the signals of an up-trending market, and will tend to clear their positions when the market shows the first signs of recovery. This will make the price decrease again. 

After the short decrease, the market goes up again; at this point, the emotion is hope

Traders start to think that the uptrend is real, so they will go long but remain suspicious.

After one more swing low, they finally believe that the market has recovered, and a sense of euphoria pervades them. The market will record this emotion, showing a sharp movement upward. The result is a swing high, often representing a top. 

After the top, comes the low. At this point, traders feel complacency: they think they’ve made a good move going long, due to the previous top, and they consider the low just as a natural and temporary decline, and they often will add to their positions. Actually, the market will experience a short rise.  

After the rise, a dramatic decline takes place: strong hands are already conscious of the downtrend and will short the market. The main feeling here is fear, which will lead to a prolonged but disordered decline. 

The lowest low will represent the end of the downtrend, often followed by a period of uncertainty — or lateralization, describing the absence of successive increasing highs or decreasing lows and theoretically not considered a trend — that will be exploited by informed traders to accumulate. 

This accumulation will lead to a new market cycle. 


Merging Elliott Wave and Market Psychology into Swing Trading

We can merge Elliott Wave and market psychology to understand the fundamentals of swings.

The first wave of the uptrend — denoted as wave “I” in Elliott’s terms — is the result of the accumulation put in place by strong hands, but it is accompanied by mistrust. If the accumulation and wave I take us to the first swing high, the underlying mistrust will lead to the second wave — a corrective wave II — and a swing low.

The third wave of the uptrend, wave III, is led by hope. It will last longer since traders will gradually join the positive market phase — they still have some reservations about the reliability of the trend. Hope will lead to the formation of wave III and a new swing high; reservations will lead to wave IV — again, corrective — and a new swing low. 

As soon as the market rises again, traders feel euphoric and finally trust the uptrend. Wave V is then formed, leading to a new swing high.

The decline after a pump is sharp. The most advanced and wise traders, the strong hands, know that the uptrend is over; they want to take their profits, but they still want to test the water.

The first impulse wave of the downtrend — wave A — will be relatively short due to those reasons. It will lead to a new swing low, followed by a corrective wave upwards — wave B — which is the result of the combined forces of strong hands still observing the market and weak hands filled with complacency. Wave B ends in a new swing high.

Wave C will be dramatic. Weak hands are prey to fear and anxiety, acting nervously; strong hands fully trust the downtrend. Wave C will lead the market to the lowest swing low of the cycle.


Swing Trading Strategy Based on Fibonacci

To have an idea of which points to choose to go short and long, you can use Fibonacci retracements and extensions

You can use them to locate support and resistance areas, and since swing trading fits the theory formulated by Elliott, we can use the Fibonacci levels he considered popular. 

Of course, you should use them as levels at which you should watch your positions more carefully, and decide to go on or review your market analysis.

Also consider that the crypto market tends to move faster, so track the most popular Fibonacci levels according to the crypto you are analyzing. 

The most common Fibonacci levels are 23.6%, 38.2%, 50%, 61.8%, 78.6% and 100%, but our analysis of crypto markets reveals that 85.4% is also a common retracement level. 

To be more confident with your market analysis, consider these guidelines based on Elliott’s theory: 

  • Wave III is never the shortest wave;
  • The swing low formed by wave IV should be higher than the wave I swing high, except in cases of diagonal triangles;
  • Wave II never retraces more than 100% of wave I;
  • Especially in zigzags, wave A and C tend towards equality; if not, wave C is usually 161.8% of wave A; and
  • Consider alternation: for example, if wave I is extended, wave V will not. 

These guidelines will help you in identifying possible levels for swing highs, swing lows, resistance and support zones, as well as stop loss and take profit levels. 

Of course, as traders and investors, you should always do your own research and consider your market analysis to make your decisions.


Our aim is to create a platform that offers users the most enjoyable trading experience. If you have any feedback, please reach out to us at feedback@btse.com or on Twitter @BTSE_Official.

Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.

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