Introduction to the Elliott Wave Theory

The Elliott wave theory was discovered by Ralph Nelson Elliott. 

According to the Elliott wave principle, market prices follow some recurrent cycles called waves.

 Waves are patterns of directional movement. Prices change their dynamics based on crowd behaviour.

The Elliott wave principle is predictive in nature. It gives some insight about the probable future direction of the market.

 Elliott suggests that there is a five wave pattern. This five wave pattern consists of impulse waves and corrective waves.

 There are three impulse waves going alongside the major trend and two corrective waves going against the major trend.

Elliott wave guidelines

• Wave 1, wave 3 and wave 5 determine the direction of the market

• Wave 2 and wave 4 are counter waves to wave 1, wave 3 and wave 5

• Wave two never retraces more than 100% of wave one.

• Wave 3 is usually the largest and most powerful

• Wave four does not overlap with the price territory of wave one. 

Elliott wave development

Wave development takes place in two phases: motive and corrective.

Motive waves have a five wave structure whereas corrective waves have a three wave structure.

When motive waves and corrective waves are combined they form a complete wave cycle of eight waves.

Motive waves are labelled 1-5

Corrective waves are labelled a-c

The sequence a, b, c corrects the sequence 1, 2, 3, 4, 5

At the end of the eight-wave cycle begins a second similar cycle of five upward waves followed by three downward waves. 

The Wave Principle, then, reflects the fact that waves of any degree in any series always subdivide and re-subdivide into waves of lesser degree and simultaneously are components of waves of higher degree.

Each wave is comprised of smaller wave patterns. To make it easy to label these waves, Elliott wave theory has categorised all waves by relative size from largest to smallest:

• Grand Supercycle (multi-century)
• Supercycle (multi-decades)
• Cycle (decades)
• Primary (years)
• Intermediate (months)
• Minor (weeks)
• Minute (days)
• Minuette (hours)
• Subminuette (minutes)

A Grand Supercycle subdivides into a supercycle which subdivides into a cycle which subdivides into Primary waves which subdivide into Intermediate waves which subdivide into Minor waves which subdivide into Minute waves which subdivide into Minuette waves which in turn subdivide into Subminuette waves.

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