The market is not fully unpredictable, by applying tools and techniques traders can predict the market movements to some extent. Analysing market direction had been started since a long time ago. The history behind the development of Elliot Waves is quite interesting. After noticing repetitive patterns in the market, Ralph Nelson Elliott began studying past 75 years market data and developed Elliott Wave theory in late 1930. Elliott Wave is nothing but a specific pattern which helps to identify current market movements, price action, future market fluctuation etc. This article covers the particular theory along with the application steps.
Definition of Elliott Wave
Most of the time the market tends to follow a similar recognizable pattern. When these repetitive patterns form “wave” based shapes, considers as EW (Elliot Waves). Though it is not a fully forecasting tool, interprets details behavioral description of the market. In EW, basically, two core sequences are there.
Web development occurs in two distinctive phases, Motive Waves, and Corrective Waves.
The impulsive or motive wave consists of five waves while the correction wave includes three waves only. The Motive and Correction waves together form the entire cycle of the eight waves in EW.
Here in the above picture motive waves are labeled at 1 to 5 and Correction wave is labeled at a to c.
Rules to Follow
Remember certain things regarding the EW while applying this theory to script. Waves 1, 2, 3 indicates the direction of the market. Waves 2 and 4 consider as the counter moves to waves 1, 3, 5. There are three key rules of the theory as stated below:
- Waves 2 never moves below the wave 1
- Waves 3 never be the shortest
- Waves 4 never enters wave 1
However, these are the basic guideline regarding EW. Therefore, you need to follow the pattern in order to find repetitive orders in the market. This is one of the important concepts in the technical analysis.
Indrajit is a professional blogger and trading system developer. Amibroker expert, WordPress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.