Elliott Wave Theory, developed by Ralph Nelson Elliott, proposes that the seemingly chaotic behavior of financial markets is not actually chaotic. Instead, markets move in predictable, repetitive cycles or waves, which can be measured and forecasted using Fibonacci numbers.
Basics of Elliott Wave Theory:
Motive Waves: These are movements in the direction of the larger trend.
Corrective Waves: These are movements against the main trend.
Market prices alternate between a motive phase and a corrective phase across all time scales. Wave analysis offers insights into trend dynamics and helps traders understand price movements on a deeper level, providing a degree of anticipation and prediction when identifying trading opportunities.
Motive waves, in general, can be categorized as impulse and diagonal waves. Some guidelines are given below. Remember, guidelines are tendencies, not set-in-stone rules.
Corrective waves have a lot more variety and are less clearly identifiable compared to motive waves, making them an important component of Elliott Wave Theory. Mastering corrective waves requires more attention and is essential for becoming a successful Elliott wave practitioner.
Elliott corrective waves are patterns that move against the main trend and consist of three primary wave structures:
Zigzag: A sharp correction in a 5-3-5 structure.
ZigZag Flat: A sideways correction in a 3-3-5 structure.
Triangle: A consolidating pattern in a 3-3-3-3-3 structure.
These corrective waves help identify temporary counter-trend movements within the overall market trend.
Complex corrective waves, known as double threes and triple threes, are combinations of simpler corrective patterns, providing greater complexity and variability in market corrections
Double threes
Triple threes
The Elliott Wave Theory offers valuable insights that help technical analysts monitor and understand the movements of financial asset prices over both the short and long term.
Please note that these patterns do not guarantee future price movements but instead help to assess the probabilities of future market actions. They can be used alongside other forms of technical and fundamental analysis, including technical indicators, to identify specific trading opportunities.
