Elliott Wave Theory

Once upon a time there was a man named Ralph Nelson Elliott. He was an American accountant who studied stock market tirelessly.

After analyzing about 75 years of stock data, he came to a conclusion, and released it in a book when he was ready.

Though Elliott passed away in 1948, trading with his theory became mainstream in the 1970s when the book, Elliott Wave Principle was published by A.J. Frost and Robert Prechter.

He suggested that while stock prices often look unpredictable, they are quite predictable indeed and can be measured using Fibonacci numbers.

The market, according to Elliot, trades in repeated cycles and it is influenced by the outside world with news events.

Elliot taught the downward and upward swings in price action and called then waves.

The Theory

One reason for the popularity of the Elliot Wave is that it combines the technical and fundamental news.

The theory is based on the cyclical pattern of market events. Even if there is a disastrous recession, sooner or later, the existing conditions should revert back to as they were before the recession.

The basic principle of the Elliot Wave Theory is that over a certain period of time, markets move in certain patterns.

The theory states that there will be five moves in the direction of the main trend preceding three corrective waves.

The five moves in the direction of the trend are shown as the “1,2,3,4,5” below. The three corrective waves are the “A,B,C”.

This pattern can be used on multiple time frames from small to large to help identify the direction of the market.

Please leave your comments and tips concerning Elliot Wave patterns. Have you traded from them yourself?

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