Elliott wave theory - Enhance trading using wave principles

When it comes to predicting, forming, anticipating market predictions, Elliott wave is the one which is commonly used. Even though there are many other complementary theories and rules which also provide key tools for performing technical analysis, Elliott wave theory is the one which is highly beneficial for market predictions.

This theory was developed in the 1930s by Ralph Nelson Elliott. Elliott believed and showed that there are more common structures available for markets which are different from the chaotic form used by most of the analysts. Later his cycles and waves became one among the most used and most popular methods. Through his theory, it became possible for technical analysts to view the financial markets.

Elliott wave theory - Cycles and waves

More than simple straight lines, psychological elements in the trading can bring in waves. These waves are the biggest features in the Elliott wave theory. This theory is highly influenced by Charles Dow’s theory as well. Dow stated that stock prices usually move in the form of waves.

Elliott’s waves

There are two types of waves explained by Elliott. One is an impulsive wave and other is a corrective wave. Impulsive wave is the one which actually moves in the direction of the trend. The corrective wave always moves against it and follows counter-trend. There will be five waves which in combination forms the larger impulsive wave and later comes the 3-wave corrective phase which is nothing but the corrective wave. The fractal nature here is nothing but the ability to look the 5 waves as single impulsive wave.

The theory

Elliott explains that each and every action will be followed by a reaction. Hence one must understand that there will be a corrective move for each and every impulsive move. As explained, the first 5 waves will form impulsive move and this move along the direction of main trend. Later the subsequent 3 waves will help in providing the corrective moves. So, there will be five-wave impulsive move and followed by a corrective move which is formed by 3-waves. The impulsive waves are labelled using 1-5 numbers and corrective waves using letters A, B, and C. when the 5-3 move gets completed that completes the actual cycle.

Fibonacci within waves

The utilization of corrective waves also highlights the study of Fibonacci retracements. But actually Elliott never used Fibonacci levels specifically but later traders started applying these and this added a bit of complexity to this theory.

Final thoughts

Even today Elliott wave theory is helping when it comes to providing a view of the structure of the market for the majority of the people. There are many advantages of using Elliott theory in understanding the prices and market actions. This theory is one among the very popular method for analyzing the market and it does this through a technical approach. Elliott wave theory always concentrates on price action and we must agree that price is something which is beginning as well as end of the analysis. This theory also believes that there is an important relationship between credit, liquidity, and economic robustness.