publish2017-06-27 3:26 pm

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What is Elliott Waves Theory?

elliot waves theory

Financial experts have developed several tools to identify and anticipate the market behavior and price movement, some of those tools or techniques rely on the theory of market cycles in which some patterns are going to occur frequently over time, and there are some clear signs that show it starts and ends.

What is Elliott Waves Theory?

The Elliot Waves theory said that the market has repetitive cycles, and those cycles are the logical outcome of the investor reaction to the general social influence or the psychology of the masses indirect pressure on traders. On November 1934, he could prove a strong correlation between the market and asset’s price with the outside social influence on the brokers. He discovered that the market upward or downward trending was associated with the social feeling or the general population perception for the moment. The swing in the price direction was the same as the swing in people general perception. Elliott divided the cycles and named those divisions as waves, in which each wave is the subdivision of a very specific and well-identified pattern. Each wave or market cycle can be further divided into smaller segments to have a better understanding of its nature and implications. The Elliot Wave’s theory recognized several prices and market patterns making possible to anticipate the future behavior or the assets price once a pattern cycle is identified and its wave position is determined.

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Understanding Elliott Waves Theory

·Market cycles are the price fluctuation during a very specific period.

·Each market cycle is composed of several waves, which can be subdivided into shorter segments and those segments can be divided into shorter trace repeatedly.

·Waves are composed of increases and decreases in the asset’s price

·Waves theory does not predict the future or anything; it only anticipates the future price movement based on recorded past patterns that are repeating over time.

·There are clear signs during the entire cycle, which allows identifying where in the cycle the market is and what will be the next price movement direction.

·Impulse waves are strong waves that dominate the price movement direction; they can last hours or even months, and they have the same direction as the primary trend.

·Corrective waves are weaker than impulse waves, they are in the opposite direction of the primary trend, and they have a short duration.

·The lines drawn on a price chart by the impulse and corrective waves creates several patterns that are easy to identify and track.

Elliot wave theory in a nutshell: it said that prices and the market move in repetitive patterns over time, the different patterns are named as cycles, which is  formed by waves and the waves are repeatedly subdivided into shorter segment making easier to identify where in the cycle the asset market is at any moment. Once the pattern is identified, it is possible to anticipate its future movement direction. The wave theory has two basic waves the impulsive and the corrective, which move in different directions.

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