Elliott Wave theory was formulated by R.N. Elliott in the 1930s based on his study of 75 years of stock charts covering various time periods.2 Elliott, whose theory gained adoption in the investment community, designed it to provide insights into the probable future direction of larger price movements in the equity market. The theory can be used in conjunction with other technical analyses to pinpoint potential opportunities.
The theory seeks to ascertain market price direction through the study of impulse wave and corrective wave patterns. Impulse waves consist of five smaller-degree waves net moving in the same direction as a larger trend, while corrective waves are composed of three smaller-degree waves moving in the opposite direction. To the theory's advocates, a bull market consists of a five-wave impulse, and a bear market consists of a corrective retracement, regardless of size.
The number of waves in a five-wave impulse, the number of waves in a three-wave correction, and the number of waves in combinations thereof accord with Fibonacci numbers, a numeric sequence associated with growth and decay in life forms. Elliott noticed that wave retracements often conform to Fibonacci ratios, such as 38.2% and 61.8%, which are based on the golden ratio of 1.618. Wave patterns are also a part of the Elliott Wave oscillator, a tool inspired by Elliott Wave theory that depicts price patterns as positive or negative above or below a fixed horizontal axis.
Elliott Wave theory continues to be a popular trading tool thanks to the work of Robert Prechter and his colleagues at Elliott Wave International, a market research firm formed to apply and enhance Elliott’s original work by integrating it with such current technologies as artificial intelligence.
The theory seeks to ascertain market price direction through the study of impulse wave and corrective wave patterns. Impulse waves consist of five smaller-degree waves net moving in the same direction as a larger trend, while corrective waves are composed of three smaller-degree waves moving in the opposite direction. To the theory's advocates, a bull market consists of a five-wave impulse, and a bear market consists of a corrective retracement, regardless of size.
The number of waves in a five-wave impulse, the number of waves in a three-wave correction, and the number of waves in combinations thereof accord with Fibonacci numbers, a numeric sequence associated with growth and decay in life forms. Elliott noticed that wave retracements often conform to Fibonacci ratios, such as 38.2% and 61.8%, which are based on the golden ratio of 1.618. Wave patterns are also a part of the Elliott Wave oscillator, a tool inspired by Elliott Wave theory that depicts price patterns as positive or negative above or below a fixed horizontal axis.
Elliott Wave theory continues to be a popular trading tool thanks to the work of Robert Prechter and his colleagues at Elliott Wave International, a market research firm formed to apply and enhance Elliott’s original work by integrating it with such current technologies as artificial intelligence.