#ElliottWaves is a popular method of technical analysis (TA), which allows traders to track recurring trends on charts and make forecasts of further movements of #exchange assets. This method is based on the theory that market trends follow patterns that reflect the psychology of crowd behavior.
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The bases of the wave theory were formulated in the 1930s by American financier Ralph #Elliott .
All in all, he identified 13 wave patterns which were regularly traced on the charts he studied. In this case, it was exclusively about the repeatability of the form, but not the amplitude or time intervals. The mathematical basis of the theory was the sequence of Fibonacci numbers, and its brief description was originally published in an 18-page pamphlet entitled "The Wave Principle.
For several decades, no one paid much attention to Elliott waves and did not apply them in practice. Only in the 70's, this TA method became widespread among traders, thanks to the efforts invested in the development and popularization of the wave theory by Robert Prekter and Alfred Frost.
Initially, this tool of technical analysis was focused exclusively on the stock market, but later it began to be used in trading almost any exchange-traded assets, including the now popular cryptocurrencies.
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The Elliott Wave Theory is based on the observation of trend movements of exchange rates, in which repeating fragments (waves) are identified.
They are formed due to a cyclical shift in the balance between supply and demand for the asset in question.
There are two types of Elliott Waves:
Impulsive (moving) - they go in the direction of the main trend;
Correctional (rollback) - directed against the trend, they are corrections of impulse waves.
The main formation in wave theory, in fact, consists of one impulse cycle (upward movement) and another correctional cycle (downward movement). The first one includes waves 1-5, the second one includes waves A, B, and C. Each of them, in turn, is divided into similar sections on smaller timeframes.
In theory, any more or less experienced trader can identify the trends of 5 and 3 waves on the chart by eye. The main problem is the subjectivity of the analysis of the existing structure, since each observer has different waves in terms of size, slope angle, etc.
In order to smooth this point, Elliott, and later the theorists who continued his work, created a number of rules that help to distinguish the basic pattern of waves on the chart:
The second wave should not end below the initial mark of the first wave.
The 4th wave cannot enter the price territory of the second wave.
3 must end above the extreme mark of the first wave. In addition, it cannot be the shortest among the three impulse waves. More often than not, it is the longest of them.
The fifth wave must end higher than the third wave.
The rollback in the 8-wave structure cannot consist of more than 3 waves - only ABC, no DE, etc. (but in other models this is acceptable).
In an upward movement, one of the three driving waves should exceed the length of the other two.
The end of the ABC corrective cycle should be approximately at the end of wave 4 or slightly below it.