Elliott Waves

November 21, 2023 - Around 2 mins mins to read

Comprehending Elliott Waves

Elliott Waves, a fundamental concept in the realm of stock and crypto market trading, were initially introduced by Ralph Nelson Elliott in the 1930s. Elliott’s discovery of these waves stemmed from his observation of repetitive fractal wave patterns. The Elliott Wave Theory serves as a technical analysis tool utilized to examine price movements in the financial market by scrutinizing changes in investor sentiment and psychology. Contrary to the common belief that stock markets behave randomly, Elliott found that they actually adhere to repetitive patterns referred to as waves. Traders who aim to identify market trends often describe this process as “riding a wave”.

Upon retiring at the age of 58 due to health concerns, Elliott redirected his attention towards the stock market. He noticed that the same patterns he observed in financial markets were closely intertwined with significant swings in investor psychology. The Elliott Wave Theory shares similarities with the Dow Theory, as both theories acknowledge that stock prices move in waves. However, Elliott’s unique contribution was his recognition of the fractal nature of these patterns, enabling a more intricate analysis. Fractals are mathematical structures that perpetually repeat themselves. By comprehending this concept, Elliott was able to employ these patterns as predictive indicators for future market movements.

As per the Elliott Wave Theory, various types of waves exist. An impulse wave, which aligns with the overall trend, encompasses five waves within its pattern. Conversely, a corrective wave moves in the opposite direction. This pattern recurs on smaller scales, showcasing its fractal characteristics.