Everything You Should Know About Elliot Waves

In the 1930s, Ralph Nelson Elliott established the Elliott Wave Theory. Elliott argued that stock markets, which are widely assumed to function randomly and chaotically, traded in repeating patterns. In this article, we'll go over seven crucial things that you should know about Elliot Waves. But before we get into that you need to understand that investment is also about choosing the right technologies. As one of the top brokers in share market, we at Zebu offer trading accounts with lowest brokerage, and an online trading platform to help you focus only on executing your strategies efficiently. We'll look at the history of Elliott Wave Theory and how it's applied to trading in this post. Waves Elliott suggested that financial market patterns are determined by investors' dominating psychology. He discovered that swings in popular psychology usually manifested themselves in predictable fractal patterns, or "waves," in financial markets. Market Forecasts Using Wave Patterns Elliott made precise stock market predictions based on reliable wave pattern qualities he found. An impulse wave always exhibits a five-wave pattern because it travels in the same direction as the broader trend. On the other hand, a corrective wave net travels in the opposite direction of the main trend. On a smaller scale, five waves can be detected within each of the impulsive waves. Interpretation of the Elliott Wave Theory Five waves advance in the direction of the primary trend, followed by three waves in the direction of the corrective (totalling a 5-3 move). This 5-3 move is then subdivided into two subdivisions of the following upper wave move. While the underlying 5-3 pattern remains consistent, the duration of each wave varies. Consider the following chart, which contains eight waves (five net upward and three net downward) labelled 1, 2, 3, 4, 5, A, B, and C. The impulse is formed by waves 1, 2, 3, 4, and 5, whereas the correction is formed by waves A, B, and C. The five-wave impulse, in turn, generates wave 1 at the next-largest degree, while the three-wave correction generates wave 2. Normally, a corrective wave consists of three independent price movements - two in the direction of the primary correction (A and C) and one in the opposite direction (B). Correction waves 2 and 4 are depicted above. Typically, these waves have the following structure: Take note that waves A and C in this illustration move in the direction of the trend at a greater degree, indicating that they are impulsive and composed of five waves. By contrast, Wave B is anti-trend and thus corrective, consisting of three waves. When an impulse wave is followed by a corrective wave, an Elliott wave degree containing trends and countertrends is formed. As illustrated in the patterns above, five waves do not always go in a net upward direction, and three waves do not always travel in a net downward direction. When the larger-degree trend is downward, for example, the five-wave sequence is downward as well. To apply the idea in daily trading, a trader may spot an upward-trending impulse wave, take a long position, and then sell or short the position when the pattern reaches five waves indicating a reversal is likely. The Verdict Elliott Wave practitioners highlight that just because a market is fractal does not automatically make it predictable. While scientists recognise a tree as a fractal, this does not indicate that the route of each of its branches can be predicted. In terms of practical application, the Elliott Wave Principle, like all other analysis methodologies, has its supporters and critics. One of the critical flaws is that practitioners can always blame their chart reading rather than flaws in the theory. Alternatively, there is an open-ended understanding of the duration of a wave. As we mentioned before investment is also about choosing the right technologies. As one of the top brokers in share market, we at Zebu offer trading accounts with lowest brokerage, and an online trading platform to help you focus only on executing your strategies efficiently.