Elliott Wave Theory is a fundamental concept in technical analysis that helps traders understand market cycles and predict future market trends.

Let’s explore the key components of Elliott Wave Theory:

  • Elliot Wave Theory

  • Basic Waves

  • Corrective Waves

  • Elliott Wave Cycle.

Elliott Wave Theory

The Elliott Wave Theory suggests that price movements can be reasonably predicted by studying price history, as markets move in wave patterns. Similar to ocean waves, these movements are repetitive, rhythmic, and timely.

Basic Motive Wave

A Basic Motive Wave moves in the direction of the larger trend and is subdivided into five smaller waves. The actionary sub-waves, which are waves 1, 3, and 5, advance the trend, while the corrective sub-waves, waves 2 and 4, move against it.

Rules for Motive Wave Formation

The formation of a Motive Wave follows three key rules:

- Wave 2 always retraces less than 100% of Wave 1.

- Wave 4 always retraces less than 100% of Wave 3.

- Wave 3 always extends beyond the end of Wave 1 and is never the shortest wave.

Corrective Wave

Corrective Waves typically have a three-wave structure, labeled as waves A, B, and C. However, this can be misleading because not all corrective waves follow exactly a three-wave structure.

In a Corrective Wave, Wave A and Wave C move in the direction of the larger trend, while Wave B travels against the direction of the larger correction. Consequently, Wave B is often depicted as consisting of three smaller waves.

Elliott Wave Cycle

The Elliott Wave Cycle consists of a combination of a motive wave and a corrective wave, forming the complete structure. This cycle is illustrated with a total of 8 waves, comprising a 5-wave movement in the direction of the trend, followed by a 3-wave correction against the trend.

The chart depicted above showcases the eight-wave structure within a declining market. When observing this pattern on a chart, depending on the Higher Time Frame (HTF), one might anticipate another five waves downwards. This pattern is commonly recognized as the "Bearish Elliott Wave Cycle."

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