Elliott Waves

What Is an Elliott Wave?

The Elliott Wave pattern is a type of technical analysis that traders use to analyze market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. It was developed by Ralph Nelson Elliott in the 1930s.

In its most basic form, the Elliott Wave pattern consists of five waves in the direction of the main trend (known as impulse waves) followed by three corrective waves (a 5-3 move). This forms a complete Elliott wave cycle.

1. Impulse Waves: These are the five waves that move in the direction of the main trend. They are labeled as 1, 2, 3, 4, and 5. Wave 1, 3, and 5 are motive, meaning they go along with the overall trend, while Wave 2 and 4 are corrective, moving against the trend.

2. Corrective Waves: After the five-wave sequence, a three-wave corrective phase follows, labeled as A, B, and C. Here, Wave A and C are motive (moving against the main trend), while Wave B is corrective.

So, in a bull market, the pattern would look like a strong rise (Wave 1), a modest fallback (Wave 2), another long upward move (Wave 3), a slight pullback (Wave 4), and a final upward move (Wave 5). This would then be followed by a three-wave downward correction (A, B, C).

The pattern in a bear market would be the reverse of this, with the five-wave impulse move going downward and the three-wave correction moving upward.

It's worth noting that these cycles are fractal in nature; that is, they occur on all time scales, from minutes to years, and the smaller cycles nest within the larger ones. This means that a complete cycle at one level can be just one wave at a higher level.

Understanding and applying the Elliott Wave theory can be complex as it requires the interpretation of wave counts, which can be subjective and vary among analysts. Also, like any other trading strategy, it's not 100% accurate and should be used in conjunction with other technical analysis tools to confirm signals.