Elliott Wave Theory – Concept, Cycle’s and Waves, Combination of Concepts & more

If you are someone who is planning to work in the share market, then you just can’t ignore this theory – Elliott Wave Theory.

Back in the 1920s, Ralph Nelson developed this theory known as Elliott wave theory.

The great man came to understand that the financial movements in the market tend to move in waves that are frequently repeated.

You can also call these waves movements. The theory is pretty complicated, so practitioners take years to master it.

Even though the theory is complex, but it features some of the elements that you can incorporate easily. It helps in enhancing the analytical skills and timing of the trade.

About Elliott Wave Theory

The main aim of developing the theory was to describe the price movements prevailing in the market.

Investors identify waves not in the price of the underlying securities but also in consumer behavior. You can call the investors as riding a wave who try to profit from a market trend.

A refinancing wave is a large and robust movement by investors to replace the current mortgages with new ones.

The expert Ralph Nelson Ellison believed that there was way more common structure to the market as compared to the chaotic form that most analysts see.

Experts say that his work is one of the most splendid results of all time. Thanks to the development of this theory that the technical analysts even today can view the financial markets.

Even though there are plethora of reviews over the techniques of Eliott, analysts still respect him.

Eliott used the stock market as the primary source of his research as it was a quick way to learn about the past and current behavior of the market.

Under this theory, he identified a plethora of waves or movements. Additionally, he identified patterns of waves that recurred with similar patterns.

If the investors have excellent knowledge about these patterns, then they can gauge the overall movements. In short, investors can get an idea about the market movement.

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Cycles and Waves in Eliott Wave Theory

Often, the psychological element provides waves instead of simple lines. Above all, the waves are one of the most prominent features of the Eliott Wave theory.

To a great extent, the waves reflect Elliott’s studies of the Charles Dow Work. Typically, as per the theory, the prices move in waves.

Besides the waves, Ralph Nelson Ellison also considers cycles that accounts for the nature of patterns. Mainly the theory refers to waves as the necessary form prevalent in the market.

The waves have fractural character, so the same patterns are visible in both long-term and short-term markets.

As the same patterns are repetitive in nature, so Eliott developed this theory to predict the price movements in the future.

The Eliott’s Waves

Typically, Eliott’s waves are impulsive in nature. These moves with the trend and the corrective trend follows, which is a counter-trend ideally.

Typically there are five ways that form one sizeable impulsive wave. Before the three-way corrective phase forms, the five waves form.

You need to know that when you are able to see the first five waves as a single impulsive wave, shows the factual nature.

Additionally, you can see the same patterns on both smaller and bigger timeframes.

Impulsive and Corrective Waves

Prices tend to move in impulsive and corrective waves. If you know the type of wave, then you can understand the forecast what the price is likely to look like.

Sudden wave usually depicts a large price move and also similar trends in the association as the waves are more extensive than moves, because uptrend keeps reaching higher prices.

Within the trend, corrective waves are smaller waves. You can choose to trade in the direction of the impulse waves mainly because price tends to make a big way.

Corrective waves can help you enter the trend trade and also enables you to grab the next more significant impulsive wave.

The main agenda of impulsive and corrective waves is to determine when the trend will change in direction.

A much larger down move tends to take place if a price chart shows big moves to the upside.

Trend and Pullback Price Structures

Typically, it features three sizeable upward price moves when the trend is underway. It creates a five-wave pattern impulse and correction.

Three waves follow the uptrend, including impulse down, a correction to the upside, and impulse down. The waves are A, B, and C.

As the movements are fractal, which means patterns occur on small and large time frames. The price structures also suggest when to enter trades and even the direction of the trend.

Typical Correction Size

It is essential to know the size of the correction. Suppose you want to buy corrections during an uptrend or selling on corrections during a downtrend.

As per the five-wave pattern, wave one is an impulse wave. On the other hand, wave two is the first correction.

Wave three is impulse, and wave four is corrective. Lastly, wave five is impulse.

Combing the Three Concepts: Elliott Wave theory

You can use three concepts by considering in the impulse waves direction. During the corrective waves, you can take trades.

Once the price is correcting the average amount, you can look for trade signals. You can also consider keeping track of all the five ways to get a clear picture of the trend.

When you watch the direction of the impulse waves, then it will signal potential changes in trends. The signal tends to be stronger if the trend is linked with the five-way impulsive pattern.

Elliott Wave Theory – Conclusion

The best part about the Eliott wave theory is that it helps in improving the analytical skills of traders or enhances the timing of their trade.

But just like all other things, the theory also comes with some cons, like it is quite challenging to apply. It is mainly because it is not easy to isolate three and five-wave patterns.

Even today, the theory helps in providing a structured sense to the market.

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