Elliott Wave Principle
A technical analysis theory that markets move in predictable wave patterns of five impulse waves and three corrective waves.
The Elliott Wave Principle is a form of technical analysis developed by Ralph Nelson Elliott in the 1930s. It proposes that market prices unfold in specific patterns called waves, driven by collective investor psychology. The basic pattern consists of five waves in the trend direction (impulse) followed by three waves against it (corrective). Practitioners use wave counts to identify where the market sits within a larger cycle.
How It Works
- Impulse phase: waves 1, 3, and 5 move with the trend; waves 2 and 4 correct against it
- Corrective phase: three waves labelled A, B, and C retrace a portion of the impulse move
- Wave 3 is typically the longest and strongest. Wave 2 never retraces more than 100% of wave 1.
- Waves contain sub-waves, creating a fractal structure across timeframes
- Fibonacci ratios (38.2%, 50%, 61.8%, 161.8%) are used to project wave targets
Trading Tips
Wave counting is subjective. Two practitioners can produce different counts from the same chart. Always have an invalidation level.
Focus on identifying wave 3, which tends to be the most profitable opportunity
Use Elliott Wave alongside Fibonacci retracements and momentum indicators for confirmation
Related Terms
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