Introduction to Elliott Waves Theory for Beginners

Elliott Waves Theory

The market is not fully unpredictable, by applying tools and techniques traders can predict the market movements to some extent. The analyzing market direction had been started a long time ago. The history behind the development of the Elliott Waves theory is quite interesting.

After noticing repetitive patterns in the market, Ralph Nelson Elliott began studying the past 75 years of market data and developed this theory in late 1930. These waves are nothing but a specific pattern that helps to identify current market movements, price action, future market fluctuation, etc. This article covers a particular theory along with the application steps.

Definition of Elliott Waves Theory

Most of the time the market tends to follow a similar recognizable pattern. When these repetitive patterns form “wave” based shapes, considers EW (Elliot Waves). Though it is not a full forecasting tool, interprets details behavioral descriptions of the market. In EW, basically, two core sequences are there.

Elliott Waves Theory Interpretation

Web development occurs in two distinctive phases, Impulsive Waves, and Corrective Waves. Elliott waves theory is all about a five-wave pattern that happens in the financial markets. The five-wave pattern in any move is called the impulsive wave and that is followed by a 3 wave corrective move, also called the corrective wave.

The impulsive or motive wave consists of five waves while the correction wave includes three waves only. The Impulsive and Corrective waves together form the entire cycle of the eight waves in EW.

Impulsive and Corrective Waves

Here in the above picture motive waves are labeled at 1 to 5 and the Correction wave is labeled at A to C.

R. N. Elliott has observed that the financial markets during a bull market move up in a 5-wave pattern. 1st wave up then 2nd wave down then 3rd wave up then again 4th wave down and finally the 5th wave down. He also observed that after an up move, the market corrects in a 3-wave down move, A-B-C.

Elliott waves are not easy to understand and it needs consistent practice and knowledge to identify the wave patterns correctly. There are many software like Advanced Get OR Esignal to analyze this. Alpha Omega plugin for Metastock, Elwave, and MTPredictor also can calculate Elliott Waves automatically.

Rules to Follow in Elliott Waves Theory

Remember certain things regarding the EW while applying this theory to the script. Waves 1, 2, and 3 indicate the direction of the market. Waves 2 and 4 consider as the counter moves to waves 1, 3, and 5. There are three key rules of the theory as stated below:

  • Wave 2 never moves below Wave 1
  • Wave 3 never be the shortest
  • And Wave 4 never enters or coincides with Wave 1
Elliott Waves Theory

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 technical analysis.

FAQ

Is Elliott Wave Theory accurate?

Yes, Elliott Wave Theory is an accurate tool for predicting the market direction and analyzing trends over the long term. However, it does require considerable skill and experience to use effectively and should not be used alone when making investment decisions.

What is the 5-wave Elliott theory?

The 5-wave Elliot theory states that markets move in repeating cycles of five waves with two corrective counterwaves between them. This ‘impulse wave’ typically follows the dominant trend while its correction moves against it. This helps investors identify possible entry or exit points by understanding where a current cycle may be within this model compared to others in history.

What is the 1 2 1 2 Elliott wave?

The 1 2 1 2 (ABC) pattern on a chart is a basic form of analysis that traders use often during corrective phases within the longer trending movement. As with all forms of technical analysis, there are always variations based on individual trading patterns which can often affect how they are interpreted over time. Sentiment surrounding relevant stocks/indices/etcetera primarily impacts it at any given moment.

What is Ralph Elliott’s Wave Theory?

Ralph Nelson Elliott formulated his well know market timeline theory further back than most standard forms of financial technical analysis existing today – first published it as “The Wave Principle” back in 1938 after many years working as an accountant. His concept behind market trends being cyclical ‘natural’ formations composed sections was seen as revolutionary at the time – ultimately resulting in what he termed “the Elliott wave”.

Conclusion

In conclusion, Elliott Waves Theory is an invaluable tool for traders and investors looking to identify trend reversals. It uses quantitative analysis and market psychology to indicate when markets may shift directions. By analyzing the market’s past prices from a technical perspective, Elliott Waves not only provides insight into potential future price trends but can also help traders determine their ideal entry and exit points. As such, this trading strategy should be used as part of any trader or investor’s larger investment plan when deciding when to enter or exit trades.

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Author: Indrajit Mukherjee

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.

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