Elliot Wave Theory
The Elliott Wave Theory developed was by Ralph Nelson Elliott in the 1930s by discovering that stock markets, thought to behave in a somewhat chaotic manner, in fact traded in repetitive cycles.
His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns or waves that recur in the markets.
Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves. Elliott found that the markets exhibited certain repeated patterns.
Elliott discovered that these market cycles resulted from investors’ reactions to outside influences, or predominant psychology of the masses at the time.
He was Inspired by the Dow Theory and by observations found throughout nature. Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves. Advantage of Elliott wave theory is that besides trend direction you can identify and market cycle.
He found that no matter the trend movement, mass psychology always showed up in the same repetitive patterns, which were then divided further into patterns he termed “waves”.
Elliott based part his work on the Dow Theory. Dow Theory also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. This fractal nature of market helped him to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified.
Elliott Wave analysis is a collection of complex techniques. Approximately 60 percent of these techniques are clear and easy to use. The other 40 are difficult to identify, especially for the beginner. The practical and conservative approach is to use the 60 percent that are clear.
Understanding the Fractal, will help you analyzing markets more precisely.
Fractals are structures that can be split into parts. Take any part and you’ll find that is very similar copy of the whole. Mathematicians like to call this property “self-similarity”. As Elliott used fractals in his observations he found that waves could be further subdivided into smaller waves.