Elliott Wave Theory (EWT) is a form of technical analysis used to predict future price movements. It works on the principle that markets move in predictable and repeating patterns determined by investor psychology and sentiment analysis.
These repetitive patterns, known as waves, are fractal in nature and consist of both impulsive and corrective elements.
Waves are fractal
Elliott waves are fractal structures, meaning that their structures repeat at different scales. Recurring patterns within Elliott waves reflect changes in investor sentiment and can help predict future price trends.
The Elliott wave theory holds that financial prices primarily respond to shifts in investors’ mental state, as expressed by impulse and corrective waves that return at regular intervals. Furthermore, the theory pinpoints potential price points where price reversals might occur.
Traders can use the theory to identify and study fractal patterns on various time frames and analyze them for confirmation. For instance, a shorter-timeframe fractal may coincide with a wave pattern on higher time frames that further confirm its legitimacy, providing greater validation for trade setups.
They are repetitive
Elliott Wave Theory was developed by Ralph Nelson Elliott during the 1930s. After studying 75 years’ worth of charts – annual, monthly, weekly, daily and hourly ones alike – Ralph developed rules for identifying, predicting and capitalizing upon wave patterns in market movements.
His research revealed that financial markets trade in predictable cycles. These repetitive price swings are caused by mass psychology shifts and are visible on price charts as impulse and corrective waves.
Traders must first identify the trend by looking for five-wave impulse patterns in this direction. Once this has been accomplished, traders should search for three-wave correction patterns which move against it; these must retrace all five waves (Wave A), with B not breaking above its high point and C resuming the original trend in its same direction as A.
They are impulsive
Elliott Wave theory is founded on the premise that financial markets respond primarily to shifts in mass psychology. Accordingly, his theory posits that market trends can be identified through patterns in impulsive and corrective waves; for instance, corrective waves might encounter resistance at Fibonacci retracement levels or their length may never fall below Wave 2 in length. Furthermore, wave 5 should never become shorter than Wave 2.
This theory proposes that stock prices move in recurring up and down patterns that are determined by investor sentiment and psychology, including impulse waves that establish trends, as well as corrective waves that oppose it. Traders must use caution when using this approach as it depends on subjective judgment – potentially leading to wrong predictions or losses; traders using this theory should use it along with other analysis tools or indicators.
They are corrective
Elliott realized that stock prices move in repeating up-and-down patterns driven by investor psychology or sentiment analysis, known as waves. These fractal-like structures can be used to predict market movements and assist traders and investors with profiting from trading opportunities. He identified two basic wave structures – motive waves (five subwaves in an impulsive wave) and corrective waves (three subwaves); both types exhibit Fibonacci ratios in their structures.
Once a corrective wave ends, its prior trend typically resumes. However, traders should keep in mind that its conclusion can be less predictable than that of a motive wave due to their complex structures and increased overlap among their subwaves.
They are long-term
The Elliott wave theory is founded upon the assumption that stock price trends are linked to investors’ psychology. It recognizes impulse waves which create patterns, as well as corrective waves which oppose it, to predict market prices through understanding these patterns.
These patterns can help traders identify trading opportunities with favorable reward/risk ratios. It is essential that traders carefully examine a chart in order to recognize its wave structure, using Fibonacci retracement levels to pinpoint possible reversal points of the waves.
Elliott Wave Theory is also a fractal, meaning smaller patterns fit within larger ones. A seashell or snowflake could be broken up into individual Elliot waves that traders can then trade against accordingly. This allows traders to recognize these small wave formations more easily.
