CTA Wave Theory & Cycle Analysis 1 — Questions and Answers
Question 1: In Elliott Wave Theory, what are the three cardinal rules that must never be violated?
- Wave 1 must be the longest, wave 3 must retrace 50%, wave 5 must exceed wave 3
- Wave 2 cannot retrace beyond wave 1's start; wave 3 cannot be the shortest; wave 4 cannot overlap wave 1's price territory (Correct answer)
- Waves 1, 3, and 5 must all be equal; waves 2 and 4 must alternate; wave 5 must end with a Doji
- Wave 3 must be extended; wave 4 must be complex; wave 5 must equal wave 1
Correct answer: Wave 2 cannot retrace beyond wave 1's start; wave 3 cannot be the shortest; wave 4 cannot overlap wave 1's price territory
Elliott Wave's three inviolable rules are: Wave 2 never retraces 100% of Wave 1; Wave 3 is never the shortest impulse wave; Wave 4 never enters Wave 1's price territory (except in some futures).
Question 2: In Elliott Wave Theory, what is 'wave alternation' as it applies to corrective waves?
- Waves 1 and 3 must be equal in length
- Corrective waves 2 and 4 tend to differ in form — if wave 2 is simple, wave 4 will be complex, and vice versa (Correct answer)
- Each successive wave must alternate direction
- Impulse waves must alternate with corrective waves at every degree
Correct answer: Corrective waves 2 and 4 tend to differ in form — if wave 2 is simple, wave 4 will be complex, and vice versa
The guideline of alternation states that wave 2 and wave 4 corrections tend to differ in structure and complexity — a sharp wave 2 is usually followed by a sideways/complex wave 4.
Question 3: Fibonacci ratios are integral to Elliott Wave Theory primarily because:
- Fibonacci numbers determine the exact timing of market tops and bottoms
- Elliott Wave proportions and retracements commonly align with Fibonacci ratios such as 0.618, 1.618, and 2.618 (Correct answer)
- The Fibonacci sequence equals the Dow Jones average over time
- Fibonacci ratios predict interest rate changes
Correct answer: Elliott Wave proportions and retracements commonly align with Fibonacci ratios such as 0.618, 1.618, and 2.618
Elliott found that wave retracements and extensions frequently occur at Fibonacci ratios, with the 0.618 golden ratio particularly prevalent in wave relationships throughout market structure.
Question 4: What is the most common Fibonacci retracement for Wave 2 in Elliott Wave Theory?
- 23.6%
- 38.2%
- 50% to 61.8% (Correct answer)
- 78.6%
Correct answer: 50% to 61.8%
Wave 2 commonly retraces 50% to 61.8% of Wave 1, though it can retrace up to 99% — as long as it does not fully retrace Wave 1's entire range.
Question 5: In the context of Hurst Cycle Theory, what is a 'nominal model'?
- A price prediction model using fundamental analysis
- A standardized framework of idealized cycles at various periodicities that form the building blocks of cycle analysis (Correct answer)
- A chart showing only nominal (inflation-adjusted) prices
- A model using only monthly data
Correct answer: A standardized framework of idealized cycles at various periodicities that form the building blocks of cycle analysis
The nominal model in Hurst Cycle Theory is a set of idealized cycles with specific average lengths (e.g., 40-week, 20-week, 10-week cycles) used as a reference framework for cycle analysis.
Question 6: What is the 'principle of commonality' in J.M. Hurst's cycle analysis?
- All stocks trade in the same direction at all times
- Similar cyclic patterns appear across many different markets and instruments simultaneously (Correct answer)
- Cycle lengths are the same in every asset class
- Moving averages are identical across markets
Correct answer: Similar cyclic patterns appear across many different markets and instruments simultaneously
Hurst's principle of commonality states that the same cycles tend to appear across many markets at the same time, implying that these cycles are driven by common underlying forces.
CTA Wave Theory & Cycle Analysis 1
In Elliott Wave Theory, what are the three cardinal rules that must never be violated?