Ralph Nelson Elliott (28 July 1871 – 15 January 1948) was an American economist and one of the most prominent Elliott wave theorists. He developed this technique for analysing the financial market in the 1930s, based on his experience as a technical analyst and his knowledge of the theory of behavioural psychology.
Elliott observed that financial market movements followed specific patterns that could be identified and used to predict future price movements. His theory holds that these patterns repeat at different levels of temporality.
Elliott waves consist of five progressive waves in an upward trend and three corrective waves in a downward trend. These patterns repeat at different levels of temporality and are used to identify entry and exit points in the market.
Elliott wave analysis has become one of the most widely used technical analysis techniques in the world of trading and financial investment.
How do Elliott waves work?
Elliott waves work on the theory that price movements in financial markets follow specific patterns that repeat themselves at different levels of timing. These patterns consist of five progressive waves in an upward trend and three corrective waves in a downward trend.
The five progressive waves in an upward trend are called waves 1, 3, 5 while the three corrective waves in a downward trend are called waves 2, 4 and A. Each wave has its own specific shape and behaviour.
For example, wave 1 is the first wave in an uptrend and represents an accumulation phase, during which prices slowly rise. Wave 2 is the first corrective wave in a downward trend and represents a consolidation phase, during which prices stabilise or fall slightly.
Elliott waves are used as one component of a broader trading strategy and should be used in conjunction with other analysis techniques, such as fundamental analysis or technical analysis, to gain a more complete understanding of financial markets.
Specifying that
Not all traders and financial analysts use it and some regard it more as a form of interpretation than as a reliable forecasting method. It is important to emphasise that Elliott wave analysis should be used as a component of a broader trading strategy and not as an exclusive market forecasting method.
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