The Elliot Wave Theory

The Elliot Wave theory was developed back in the 1930’s by Ralph Nelson Elliot. What he actually discovered was that the markets tend to move in patterns.

Now… one has to remember that trading back then was completely different to today’s online trading. Prices of stocks were normally released to the public at the end of the trading day, via newspapers or other means of media. To receive real time prices was nearly impossible, unless you where in the field or connected, and I don’t mean mafia connected.

When summing it all up, his findings were quite extraordinary.
What Elliot found was despite all the chaos in the markets, the price pattern moved in waves. He showed that those patterns consisted of movements in a series of 5 and then in a series of 3. The first 5 wave pattern he named the “motive waves” and the last 3 wave pattern he called “corrective waves”.

    

I bet your now asking why does this interest me?

Well, Elliot wave analysis has really become a major tool when analyzing the markets or individual securities. Some technicians base their assumptions only on the waves. Once a trader knows in which wave the security is in, they already have the upper edge knowing the upcoming wave or direction.

While all waves are tradable and can be found on all timescales, most traders search for trades on waves 3 and 5 as they are thought have the most force behind them.

Waves a b c are normally shorter waves and are often classed as a pullback before the next wave cycle begins.
Our previous example can be used to describe any time frame, meaning that a one minute chart will display the same characteristics that of a weekly chart.

While there are many types of wave patterns one must note that each wave or cycle, contains smaller wave.
On the following example we can see that our simple wave pattern has suddenly become more complicated as addition waves are added within our major waves.

Ok…. Now this is where things become a little harder.