All About the Elliot Wave Theory

Before reading on, I encourage you to watch A short guide to Elliot Wave Theory below:

Ralph Nelson Elliot, the founder of the Elliot Wave Theory states that markets move following cycles similar to those of the sea, forms waves of impulsive and corrective type.

In 1930 Elliot revealed some of his studies on the movements of financial markets, based on elaborations of the principles of Charles Dow. His observation was based on the fact that some price patterns are often repeated cycles over time. Based on this theory it was therefore possible to predict future movements. These movements in price are closely related to the waves of the sea, holding a coastline following impulsive movements and then retire as a result of corrective movements.

Elliot’s theory can be applied in many different areas such as science, politics, geography, the study of societies and cultures. Although this principle is widely used in analyzing the markets, there are very few supporters claiming the sole validity of this technique to predict the movement of prices.

Wave 1 begins at the end of a corrective phase. The market is moving upwards, however, a trader who enters the market at this point must be careful because this is quite a "dangerous" spot to enter a position.

Wave 2 is a correction of initial wave with a lower price, which is higher than the low of Wave 1. At this point the trend resumes its course of action and begins a new rise.

Wave 3 is very long and dynamic, it is usually the largest and trading volumes are high. The market has an upward trend. This wave is further divided into five sub-waves with a considerable gap between them. If the wave 3 does not exceed the length of wave 1, then wave 5 is the expected result of this rally.

Wave 4 is a weak correction of the trend in place. For the Elliot theory to stand, low of wave 4 should not go below high of wave 1. At this moment Wave 5 is the next target.

Wave 5 represents the end of the movement of the main trend.

ABC Corrective waves are represented by the letters of the alphabet (a, b, c).

Wave A is a correction of the previous upward movement. A lot of new traders get caught here thinking a new upward move is coming soon (5 sub-waves are usually formed).

The next Wave B is often confused with a new upward trend when in reality it’s the beginning of a new Downtrend. They are usually formed in three waves and investors will not exchange large volumes.

Wave C is the strongest of the three corrective waves and may fall below the low of wave A.

And that's all you need to learn about the Elliot Wave Theory.

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