2025.01.20 2025.01.20
Neo Wave Theory and Pattern Explained

Michael Hypovhttps://www.litefinance.org/blog/authors/mikhail-hypov/

The Neo Wave Theory represents a fresh perspective on the Elliott Wave theory, while some analysts label it an advanced refinement of the original. I align more closely with the latter viewpoint, as Glenn Neely’s theory, while exhibiting distinctions from the Elliott Wave concept, utilizes the same fundamental principles of market analysis.

This article provides a comprehensive analysis of the NeoWave theory, highlighting its distinctions from the established Elliott’s approach. We will also explore how to interpret and construct patterns, facilitating the prediction of market development. We will also learn how to use Neo Waves in trading and evaluate the accuracy of this method by examining practical examples.

Major Takeaways

• The NeoWave theory is a recent interpretation of the Elliott Wave principle developed by  Ralph Nelson Elliott.
• In contrast to the Elliott Wave Theory, NeoWave underpins its analysis with rigorous mathematical principles and vector physics, thereby addressing the primary limitations of the Elliott Wave approach, namely its subjective nature and the potential for divergent market interpretations.
• The fundamental unit of price movement in NeoWave is a monowave. Monowaves are then combined to form segments, which in turn are grouped into more complex patterns.
• The NeoWave theory, like the fundamental principles established by Ralph Nelson Elliott, categorizes price movements into impulses and corrections.
• The rules of wavelength ratios are paramount in the NeoWave theory. These ratios form the basis for primary chart patterns, which are later refined by the rules of impulses and corrections formation, Fibonacci ratios, and other patterns identified by Glenn Neely.
• The NeoWave theory is particularly effective in commodity markets characterized by a closed consumption cycle and stable demand.

History of NeoWave Theory

In the late 1980s, Glenn Neely pursued a career as a financial analyst. Working for an oil company, he encountered the classic Elliott Wave analysis method. Immersing in the study of stock trading, Neely purchased a ready-made trading system for $2,000, which at the time was considered a fabulous sum.

Instead of achieving substantial profits, the novice analyst gained experience, realizing that using complex and expensive trading systems is ineffective without a comprehensive understanding of market principles. Neely dedicated the subsequent years to self-study, conducting market research, and systemizing his acquired knowledge.

Eventually, Neely determined that a comprehensive system encompassing diverse market analysis methods was essential. The most promising method, in his view, was the Elliott Wave Theory. However, Neely noted that the classical Elliott Wave theory had significant gaps and needed refinement. He identified the primary drawback of the Elliott Wave theory as its susceptibility to numerous interpretations and subjectivity, characteristics that rendered the method rigid and unreliable. This insight prompted Neely to develop his structured method of technical market analysis.

The result was the Neo Wave Theory, a method that sought to minimize the influence of subjective interpretation by traders. The theory integrates elements of Elliott’s theory, such as Fibonacci ratios and sequences, along with vector physics, to enhance the accuracy of market analysis. Consequently, the NeoWave theory has emerged as a new iteration of the classical Elliott method, offering a more structured and objective approach to analyzing market movements.

What is NeoWave Theory?

NEoWave, or Neely Extensions of Wave Theory, employs a similar approach to the Elliott Wave theory, utilizing Fibonacci sequences to identify ratios in directional price movements. This approach assists traders in pinpointing potential pivot points and obtaining trend continuation signals, enhancing their trading strategies.

An essential component of Neely’s system is the concept of price patterns, which facilitate the prediction of future price movements.

The value of a commodity is influenced by its historical price movements and tends to increase over an extended period. The analyst noted that by utilizing price ratios derived from historical data, it is possible to accurately predict future price movements and make more informed trading decisions.

In addition, the NeoWave system employs the principles of vector physics to analyze directional price movements. Neely’s trading system takes into account the direction and strength of price movements, allowing for more precise trend prediction and NeoWave pattern construction, eliminating subjective bias and inaccuracies.

Despite its advantages, NeoWave cannot be considered a universal system. Neely emphasized that the market should meet specific criteria for successful system implementation. Specifically, it should be a commodity market with a closed consumption cycle and stable demand, where progressive price patterns can be most clearly observed. For example, oil, metals, sugar, etc.

Elliott Wave and Neo Wave: What’s the Difference?

The Neo Wave theory was developed as an extension in which Neely attempted to eliminate the drawbacks of Elliott’s theory. A key challenge of classical wave theory is the limited number of rules and patterns, which often lead to ambiguous interpretations and errors in analysis. Glenn Neely expanded the list of rules, making his theory more objective.

The differences from the Elliott Wave theory are also evident in how patterns are built. According to the classical theory, wave formations are based on Fibonacci ratios and fundamental price patterns, which are presented visually to enhance clarity.

Glenn Neely refined the methodology of graphical pattern-building by incorporating elements of vector physics, thereby transforming a subjective model into a precise and objective analytical process.

Another distinction is that NEoWave does not impose rigid time constraints on the formation and completion of price patterns. While Neely still considers time factors, these do not dictate strict trading rules.

Types of Waves in NeoWave Theory

In a nutshell, Glenn Neely has distinguished two types of waves:

• Monowaves represent the most basic directional price movements.
• Polywaves are Neo Wave graphic patterns consisting of a series of smaller waves.

As we delve into the intricacies of market analysis, our focus will be on polywaves, which have been found to accurately reflect the market patterns identified by Elliott and Neely. Given the variety of waves and the rules of their construction, we will center our discussion on polywaves.

From a structural standpoint, a polywave can be comprised of a series of smaller polywaves or, in the closest approximation, of monowaves. The nested structure of polywaves serves as a crucial confirmation of the accuracy of graphical pattern construction. In the Neo Wave theory, there are two basic types of waves: impulses and corrections. The initial wave of an impulse must possess an impulse structure, while the subsequent wave must exhibit a correction structure.

Features of Impulses in Neo Wave Theory

Impulses are motive waves that drive the market. They have the following features:

• A five-wave structure, in which three motive waves and two corrective waves alternate. The most significant price changes occur due to impulse waves, which are formed when the market is ready to advance.
• The direction of an impulse wave coincides with the trend direction. Depending on the incline of the price movement vector, upward and downward impulses can be distinguished.
• Impulse waves have their own patterns. Early signs of an impulse wave formation confirm the trend, and their completion signals a significant market shift, either to a corrective phase or a trend reversal.

Features of Corrections in Neo Wave Theory

Corrections occur when further movement in the initial direction does not align with market expectations. They can occur due to overbought conditions in the market or when the price hits a strong resistance level. Corrections are Neo Wave price patterns that emerge between impulses, balancing the expectations of sellers and buyers and the actual market price of the trading instrument.

In terms of structure, corrections are typically classified into two categories:

• Simple corrections are comprised of three to five parts. Such formations include flat patterns, zigzags, and triangles.
• Complex corrections are a combination of simple corrections connected by linking waves.

How to Plot Neo Wave? 

It is essential to understand the structure of waves and adhere to the fundamental principles of their formation when constructing a Neo Wave. In addition, it is crucial to consider time, price, and structural factors to ensure the effectiveness of the strategy. This approach enables one to identify intricate market patterns and forecast future price movements. Let’s examine the structure of Neo Wave patterns.

Impulses

An impulse pattern develops when the market moves according to a prevailing trend and consists of five segments. The first, third, and fifth waves of such a pattern are motive, i.e., impulsive. In the case of complex waves, each segment also has a five-wave structure. The second and fourth waves are corrective.

How to plot an impulse pattern:

1. The first wave is formed in the direction of the main price movement. That is, if we are talking about an uptrend, the first wave will have an upward direction.
2. The second wave is corrective and, therefore, is plotted in the opposite direction. It cannot retrace the first wave’s starting point.
3. The third wave is an impulse wave, developing in the direction of the trend. The third segment cannot be the shortest among all impulse waves; it must exceed the second wave.
4. The fourth wave is corrective and moves against the main trend. It cannot completely retrace the third wave.
5. The fifth wave is always greater than 38.2% of the size of the fourth wave. As a rule, it exceeds 100% of the fourth wave. 
6. The fifth wave that does not reach the top of the third wave is considered a failed or truncated wave.

The chart above shows an example of a five-wave impulse pattern.

Corrections

Glenn Neely proposed that if at least one of the rules of impulse construction is not fulfilled, such a formation should be referred to as corrective waves. Corrections in the Neo Wave theory are also subject to strict structural rules that exclude the subjectivity of market interpretation. Let’s examine these rules.

Flat pattern.

• It consists of three waves labeled A, B, and C and signals that the main powerful trend will likely persist.
• Wave B usually returns to 90–110% of wave A. In an expanding flat pattern, this value can be as high as 125%. Notably, a flat pattern can be clearly identified by this feature.
• Wave C breaks through the level where Wave A has ended.
• As a rule, there is no pronounced trend within the flat pattern.
• Wave C may represent an exception from the previous rule. This wave often has a five-wave structure and can be characterized by a strong upward or downward movement.
• The wave substructure usually corresponds to a 3–3–5 pattern.

The impulse from the previous example is followed by a flat correction. The chart above shows that it is enclosed in a channel.

Zigzag.

• One of the basic types of corrective patterns in Neo Wave theory indicates a temporary retreat from the primary trend.
• It represents a three-wave pattern labeled A, B, and C, which usually follows a 5–3–5 pattern.
• A zigzag is characterized by a more intense price movement, where waves A and C are motive waves and wave C is a corrective wave. 
• Wave B rarely exceeds 61.8% of wave A.
• Wave C is often equal to or greater than wave A.

An example of a zigzag pattern can be seen on the chart above.

Triangle.

• It comprises five segments labeled A, B, C, D, and E, which can be enclosed between two lines drawn through the pattern’s extrema. 
• The structure of the waves follows the scheme 3–3–3–3–3.
• This pattern signals that the market is in a state of equilibrium. After consolidation and completion of the triangle, the price tends to form a new impulse wave and continue moving according to the trend.
• Generally, it emerges in the penultimate stage of a larger formation and is an early signal of trend weakening.

An example of a triangle pattern is on the chart above.

Structural Labels

Glenn Neely introduced structural designations or labels to make it easier to perceive various patterns on charts. These labels can be used to describe any pattern on the chart. As a rule, they are divided into base and positioned structure labels.

Base structure labels:

• “:5” is any impulse wave that is not the final wave in the Neo Wave pattern structure.
• “:3” is any wave of a zigzag, flat, or triangle pattern if its exact position within the formation is not defined.
• “:3” with underlining refers to the last three in a complex correction (flat, zigzag, or triangle).

Positioned structure labels:

• “:F3” indicates the first three. It marks the first segments of complex corrections or corrections formed between two impulse waves.
• “:c3” designates central threes. These waves are located in the central part of the pattern; that is, they cannot be initial or final.
• “x:c3” refers to central threes in the x-wave position. They connect simple Elliott price patterns.
• “:sL3” labels penultimate threes, second to the last three. This wave, consisting of three segments, always precedes the last three labeled “:L3.”
• “:L3” is the last three, the last three-segment wave of the formation.
• “:s5” denotes complex or “special” five. It can be part of a complex Elliott formation or the third wave of an impulse in which the fifth segment is failed or truncated.
• “:L5” is the last five, i.e., the final wave of the formation.

Rules for Wave Length Proportions

To apply the rules for wave length proportions, the monowaves should first be marked on the chart. The first monowave is labeled m1, with subsequent waves labeled m2, m3, and so on. To determine additional rules, the monowaves that preceded them, such as m0, m(-1), m(-2), and so on, should also be labeled.

The chart above shows an example of monowave formation based on daily lows and highs. The trading day intervals are marked by vertical lines.

The basic rules of the Neo Wave theory are built around the ratios of m1 and m2 wave lengths:

1. wave length of m2 is less than 38.2% of the length of m1;
2. m2 — 38.2–61.8% of m1;
3. m2 — 61.8% of m1;
4. m2 — from 61.8% to 100% (not including) of m1;
5. m2 — from 100% (including) to 161.8% (not including) of m1;
6. m2 — from 161.8% (including) to 261.8% (including) of m1;
7. m2 — more than 261.8% of m1.

On the chart above, the monowave m2 ranges from 61.8% to 100% of m1, so the fourth rule applies. To confirm rule 4, let’s determine the ratio of monowave m0 to m1.

Since m0 is between 38.2% and 100% of m1, condition b should be applied. Now, let’s analyze the ratio of m3 to m2 and choose a category.

The length of the m3 monowave is between 100% and 161.8% of m2. This indicates that category i is applicable in our case.

Since the level of the initial point m3 (add one time unit) is not reached during the time period of its formation, we put “:F3/:c3/:s5” at the final point of m1.

As the duration of wave m0 is shorter than the lengths of monowaves m(-1) and m1, the “:s5” label should be removed from the structural list.

In a similar manner, traders examine all monowaves and, based on their analysis, develop a precise structure of Elliott wave patterns, resulting in Neo Wave patterns: impulses, zigzags, triangles, and flat patterns.

Channels

In addition to the rules of wavelength ratios and the rules of forming complex patterns, the Neo Wave theory employs channels to confirm formations and determine possible pivot points. Let’s consider the rules of building channels for different types of formations.

Channels for Impulses

Unlike Elliott, NeoWave does not suggest drawing classical channels. Instead of two parallel lines, within which the pattern is located, Glenn Neely suggested building a support level through the lows of the second and fourth waves of the impulse.

The channel boundaries are constructed in two steps, with a connecting line drawn through the following points:

• the beginning of wave 1 and the end of wave 2;
• the end of wave 2 and the end of wave 4.

Initially, the construction of the preliminary channel begins after the start of the second wave. In the process of its formation, the channel line may change the angle as the second wave approaches new lows.

Once the third wave is completed, the channel should be adjusted. At this point, the support level should be established using the endpoints of waves 2 and 4. The channel of the impulse can be considered complete after the fourth wave reaches its low and the fifth wave begins to form.

The chart above shows a preliminary channel drawn through the beginning of wave 1 and the endpoint of wave 2.

The chart displays an adjusted channel, which is drawn using the endpoint of wave 2 and the endpoint of Wave 4. Both points are marked by blue circles.

Channels for Flat Corrections

• A baseline connects the zero point and the endpoint of wave (B).
• A parallel line is drawn through the endpoint of wave (A).

The developing channels allow traders to gauge the market’s strength or weakness in advance:

• The larger the wave (B), the greater the chances of an explosive move after the completion of wave (C).
• The smaller wave (B) is compared to wave (A), the more likely the flat will either be the first segment of a larger sequence (A)-(B)-(C), or an X-wave will follow the flat correction, with another correction after it.
• Once the channel has been perfectly developed, when wave (C) has the same length as wave (A), the correction will, in most cases, be followed by an X-wave, and the flat will become part of a complex correction.

For double and triple flat corrections, channels are built by endpoints of waves A and B of each formation.

An example of channel construction for a flat correction.

Channels for Zigzags

The channel is formed similarly to the flat correction channel. The only difference is that wave (C) can remain distant from the trend line or break through it, but it should not touch it.

The chart shows an example of a channel formation in which wave C pierces the trend line.

In the case of touching, we understand that the analyzed zigzag is a component of a more complex corrective pattern, for example, a double or triple zigzag or a double or triple three. At the same time, the wave following the zigzag should not exceed the initial point of the pattern. If it retraces less than 61.8%, it is most likely an X-wave.

In the process of analysis, we take into account that the breakout of the channel boundary by wave (C) means that its formation is at the final stage.

Zigzags are better suited for building channels than other patterns. The boundaries often pass through all extrema. Minor breakouts of the boundaries are possible.

Double and triple combinations of zigzags behave similarly to each other, developing mainly within parallel channel boundaries. The probability of breakouts increases in the area of formation of the last correctional phase, closer to its end. This happens because the last segment often contains triangles. As a rule, the last waves of these patterns may exhibit at least one false breakout of the channel boundaries before the formation comes to its completion.

Channels for Triangles

For triangles, the base trend line is drawn through the endpoints of waves (B) and (D), and its breakout is a signal for the completion of the pattern. The second line is drawn in through the endpoints of the waves:

• (A) and (C) – the most frequent method;
• (C) and (E) – this method is used less often;
• (A) and (E) – this method is applied rarely.

When plotting the lower channel boundary, it is important that the line does not intersect with the third peak. There is a separate method for this purpose.

First, we check whether the line drawn through the endpoints of waves (A) and (C) crosses the endpoint of wave (E). If it does not, we leave it, and if it crosses it, we apply the next method of channel construction and check whether the line crosses the extremum of wave (A). If there is an intersection, build a channel through the endpoints of waves (A) and (E).

The chart above shows a triangle and a channel that is drawn through endpoints of waves (B) and (D), (A) and (C). The endpoint E breaks through the lower boundary of the channel. Therefore, it is better to apply another method of its construction.

In the case of this triangle, only the third method of construction through endpoints of waves (A) and (E) corresponds to the condition of not crossing the lower boundary of the channel by the endpoint E.

Channels for Double and Triple Pattern Combinations

Combinations of patterns have a large number of variations, and therefore, there is no strict algorithm for building channels. In most cases, Neely recommends, by analogy with double and triple flat, to use as a trend line as a baseline passing through an endpoint of wave (B) that forms the sequence. At the same time, an endpoint of wave (A) may form a trend line that often does not reach the channel boundary or cross it.

How to Use Neo Wave in Trading?

In contrast to the system described by Elliott, the Neo Wave theory suggests trading according to a strict scheme, which implies multiple signal confirmations due to the rules of wavelength ratio, rules of logic, placement of movement labels, and checking the admissibility of wavelength ratios in graphical patterns.

The step-by-step market analysis using the Neo Wave methodology is carried out according to the following scheme:

1. Identification and grouping of monowaves, analyzing them using the rules of wavelength ratios, and compiling structural lists.
2. Selection of real structural labels and revealing Neo Wave patterns.
3. Analyzing patterns for compliance with the rules of formation, logic, equality, and alternation.
4. Application of movement labels.
5. Building channels.
6. Searching for market entry and exit points.

Practical Example of Trading with Neo Wave

Let’s explore the Neo Wave system with a concrete example.

The above chart shows the structural labels of polywaves that form an impulse. I will describe in more detail the rules of correlation of wavelengths, based on which the structural labels were assigned:

• First wave (:5) – rule 1, condition (b), m0 from 61.8% to 100% of m1.
• Second wave (:F3) – rule 7, condition (d), if wave m0 exceeds 261.8% of m1.
• Third wave (:5) – rule 1, condition (a), m0 is less than 61.8% of m1. Point 5 – durations and lengths of m0 and m2 are different from each other, price projections of the waves do not overlap, and the shortest among m(-1), m1, and m3 is either m(-1) or m3.
• Fourth wave (:F3) – rule 6, condition (d), m0 is more than 261.8% of m1, the time length of m2 is inferior to the same parameter of m1, and the duration of m1 is inferior to the time lengths in the set of waves m0 and m2.
• Fifth wave (:L5) – rule 5, condition (a), m0 is less than 100% of m1. Sub-condition 2 – m2 is a monowave. Point 1 – the level of the initial point is reached for a period less than or equal to the time of formation of m1 and the price projections of m(-2) and m0 do not overlap, and m2 exceeds m(-2) in length, and the lengths and durations of m(-2) and m0 differ markedly, and m(-1) has a greater amplitude than m1 and m(-3).

The Neo Wave pattern obtained as a result of polywave analysis corresponds to the rules of trend impulse formation with a stretched third wave. The pattern consists of five adjacent segments, three of which develop in the same direction. The second and fourth segments are formed in the opposite direction to the other three waves. According to the rules of logic, the wave following the impulse with the stretched third segment should reach the price area of the fourth wave. On the chart, the subsequent pullback reaches the levels marked by the fourth wave.

When employing the Neo Wave system, one can open positions according to the following scheme:

• The point of a trend reversal is determined, for example, by the endpoint of a pattern.
• The trade is opened once a candlestick moving in the opposite direction to the trend closes.

The profit is taken as the next pattern is formed. The trade is closed at the expected endpoint of the pattern once the candlestick is formed in the direction opposite to the direction of the previous pattern.

The chart above shows an example of opening and closing a short position:

1. Open a short trade after the completion of a five-wave impulse. A sell signal is the closing of the bearish candlestick, which is formed in the opposite direction to the impulse. The entry price is marked by the blue line.
2. A stop-loss order is marked by the red line. It is placed just above the end of the fifth wave of the impulse.
3. Monitor the formation of a zigzag. To identify a reversal point more accurately, the pattern should be included between the channel boundaries drawn through the extrema of the first two waves.
4. Determine the exit point and close the trade. The last three of the zigzag, marked with the structural label :L3 has a distinct three-wave structure, which can be used to determine the pattern’s endpoint. The price touching the lower boundary of the channel generates an additional signal. Once a green candlestick closes, an opposite one to the direction of the :L3 segment, lock in profits at the level marked by a green horizontal line.

Conclusion

The Elliott Wave Theory is used by modern traders as an additional analytical method for interpreting market processes. However, as an independent tool of analysis it is ineffective due to its subjectivity of interpretations.

The Neo Wave theory, thanks to Glenn Neely, is spared from this disadvantage. It offers an extensive set of rules that allow you to determine the wave structure of the market quite accurately. At the same time, Neo Wave, as well as its predecessor, combines well with the majority of other methods of market analysis.

Among the disadvantages of the Neo Wave theory, I would single out the difficulty of recognizing monowaves and polywaves, especially when it comes to determining structural labels.