Wave
Candlefocus EditorThe Elliott Wave Theory, also known as Elliot Wave Analysis, is a form of technical analysis that was created in the 1930s by famous investor and analyst Ralph Nelson Elliott. It is a theory of predictability which uses past price action and market psychology to determine what could possibly happen next. Essentially, the Elliott Wave Theory is based on the assumption that the markets move in recognizable patterns and sequences which can be used to predict future price movements.
The theory states that markets move in five distinct stages, or waves, which are labelled according to their position in the trend. These waves are the motive waves (1, 3, and 5), which drive the market upwards or downwards, or the corrective waves (2 and 4) which move the market in the opposite direction of the main trend. Elliott Wave traders hypothesize that each wave will exhibit similar characteristics and ultimately be part of the same pattern.
In addition to these five waves, there is also a fourth wave which is a flat correction and often serves as a retracement of some sort. There are also other patterns within the theory (such as the triangle, double three, and butterfly) as well as smaller corrections within each wave. Regardless of the patterns or waves, Elliott Wave traders use the notion that, over time, prices move in identifiable patterns and that these patterns are made up of waves.
When traders attempt to apply the Elliott Wave Theory to the markets, they look for repeatable patterns and cycles in the price action. Furthermore, they look for confirmation signals in other indicators such as volume and momentum. By using the Elliott Wave Theory, traders attempt to identify the trend and forecast future movements.
The theory has become popular among traders and investors who are looking to gain an edge in the markets. To many, the Elliott Wave Theory is an important tool for understanding and predicting markets. By identifying and trading these patterns, traders can potentially increase their profitability. Additionally, by understanding the psychology behind the trends, traders can make more informed trading decisions.