The Elliott wave principle was developed by R.N. Elliott in his 1938 book, The Wave Principle. The Elliott wave principle is a form of technical analysis that attempts to analyse financial market cycles and forecast market trends by looking into extremes in investor psychology expressed by highs and lows as well as prices and several other factors.
This article serves as a basic introduction to Elliott wave theory. A basic 5-wave impulse sequence and 3-wave corrective sequence are also explained. While Elliott Wave Theory can get more complicated than this 5-3 combination, this article will only focus on the very basics.
There are two types of waves in the sequence that is the impulsive and corrective phases. Impulsive waves move in the direction of the larger degree wave. When the larger degree wave is bullish, advancing waves are impulsive and declining waves are corrective. When the larger degree wave is down, impulse waves are down and corrective waves are up.
Fig 1: Elliot Wave – Basic 5 wave sequence.
Fig 1 above shows a rising 5-wave sequence. Waves 1,3 and 5 are impulse waves because they move in the same direction with the trend, where…