What is Elliott wave? Basic tenets of Elliott wave principle
In the 1930s, R.N. Elliott discovered that the stock market moves in recurring patterns that he called waves. He formulated the Wave Principle based on these wave patterns called Elliott waves.
Humans behave in a manner, when given a stimulus, in similar and probabilistically predictable fashion. This behavior of acting in similar ways makes us no different than the other creations of nature. Freely traded markets are the only sources that reflect the collective behavior of humans and the current social mood. Highly liquid markets cancel out the random events and what is left is the social mood of the mass and that indicates what we can expect in the future. We believe that any freely traded markets like Equities, Forex, Commodities move in the form of repeatable wave patterns that exhibit fractal nature at various degrees. This behavior was first observed by Ralph Nelson Elliott in1930s. This study of waves is now famously known as Elliott Wave.
Ideal Elliott wave chart:
Rules of Elliott wave:
a. Wave 2 cannot retrace complete of wave 1
b. Wave 3 cannot be the shortest of waves 1 and 5
c. Wave 4 cannot enter into territory of wave 1
All of these rules have been followed.
Guidelines of Elliott wave:
a. Wave 3 is usually the longest and can be 1.618 / 2.618 times of wave 1 or larger if extended
b. Wave 4 will usually form a triangle
c. Wave 3 if extended, wave 1 and wave 5 will trend towards equality
d. Wave 5 and wave 3 will usually show negative divergence which indicates loss of momentum and break of 2-4 trendline will confirm impulse 5 waves up is over and 3 waves downside correction has started.
b. Wave 3 cannot be the shortest of waves 1 and 5
c. Wave 4 cannot enter into territory of wave 1
All of these rules have been followed.
Guidelines of Elliott wave:
a. Wave 3 is usually the longest and can be 1.618 / 2.618 times of wave 1 or larger if extended
b. Wave 4 will usually form a triangle
c. Wave 3 if extended, wave 1 and wave 5 will trend towards equality
d. Wave 5 and wave 3 will usually show negative divergence which indicates loss of momentum and break of 2-4 trendline will confirm impulse 5 waves up is over and 3 waves downside correction has started.
There is much more to this Elliott wave theory along with practical applications. Subscribe to any of our research products and get instant access to 1 hour of Elliott wave Educational video byAshish Kyal, CMT absolutely FREE! For more information visit www.wavesstrategy.com
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