Elliot Wave Theory

Ralph Nelson Elliott published the Elliott Wave Theory by in the 1930s. After being pushed into retirement due to unhealthiness, Elliott needed something to occupy his time and began studying 75 years’ worth of yearly, monthly, weekly, daily, and self-made hourly and 30-minute charts across various indices.

The theory gain attraction in 1935 when Elliott successfully predict the stock market bottom and after many Investors, portfolio managers and traders used this theory to identify the further trends of the market.

R.N. Elliott gave detailed specific rules governing how to identify, predict and capitalize on these wave patterns. R.N. Elliott noted that this pattern does not provide any kind of certainty about further price movement, but rather help to order the probabilities for further price moment. Trades can use this theory with other technical indicators to take advantage of specific opportunities. 

Elliott Wave Theory is a method of technical analysis with long-term price patterns related to changes in investor sentiment and psychology. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale. The theory noticed different types of waves, including motive waves, impulse waves and corrective waves.

In the first small five-wave sequence, waves 1, 3 and 5 are motive (Price increase) while waves 2 and 4 are corrective (Price decrease). The movement in the direction of the trend is labelled as 1, 2, 3, 4, and 5. The three-wave correction is labelled as a, b, and c. These patterns can be seen in the long term as well as short term charts.