Elliott Wave Theory is a method to study the patterns of the stock market using technical analysis.
This technique was developed by American Accountant and Author Ralph Nelson Elliott in 1930.
Today, everyone is looking forward to generating extra income through the share market or some have an attachment with the stock market.
Even though getting a perfect hand at the stock market is not that much easy, with the help of Elliott Wave traders can analyze and quantify the price patterns in the stock market by looking at different cycles.
Through Eliott waves, traders can analyze and quantify the price patterns in the stock market by looking at different cycles and much more.
Elliott Waves and Market Connection: Let’s Understand
The primary attribution of Elliot after analyzing the market was “Investors emotions and outside influences”. These two elements constitute a pattern.
The upward and downward swings of the market are caused by the emotions and psychology of the traders.
Elliott finds that these upward and downward patterns make a zigzag formation.
He named these zigzag formations “Wave cycles”.
With the help of these wave cycles, Elliott wave analyzes the market deeply and identifies the specific characteristics of wave patterns. And based on these wave patterns
He was able to make detailed market predictions.
Elliott gave traders a system that enables them to catch the top and bottom of the market.
Elliott Wave theory states that the market moves in the same patterns that can be observed on smaller time frames on larger degree charts. We can use these moves to predict the future price movement.
As we have stated earlier these market moves and wave patterns are based on the physical sign of mass psychology.
Eight Waves combined to make a complete cycle of Elliottwave. This is done in two phases.
An impulse wave, which is further subdivided into five waves
A corrective wave, which is further subdivided into three waves
Let’s uncover Impulsive and corrective waves and understand how they work.
Just like every action is followed by a reaction, for every impulsive wave there will be a corrective wave.
The impulsive move has been formed by the first five waves, which move in the main trend direction.
Behind these impulsive waves, formation of corrective waves in the form of subsequent three waves.
Altogether we will have seen the formation of eight waves. Five wave impulse move and three waves corrective move which we call a 5-3 move.
The five impulsive waves are labeled as 1-5, whereas three corrective waves are labeled as A, B, C.
Once 5-3 moves are completed it means that one cycle is completed.
3 out of 5 waves of an impulsive wave move with the trend while 2 waves are against the trend. Whereas in corrective waves, out of three waves,
one moves with the trend and two are against the trend. That’s it.
Hope you understand the basics of Elliott Waves, very soon we will come with part 2 with some deep understanding for you. GannAndWaves
