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 proposes markets move in five-wave impulses followed by three-wave corrections, driven by investor psychology. Practitioners count waves to forecast what comes next.
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
Elliott Wave Principle Example
Say EUR/USD rallies in five choppy legs from 1.0800 to 1.1200, then corrects in three legs back to 1.1000. An Elliott trader labels the first sequence waves 1 to 5 and the pullback A-B-C, then positions for the next impulse instead of chasing the top.
How Traders Use Elliott Wave Principle
Use wave counts as a map, not a prophecy: always have an alternate count and let invalidation decide. Waves work best for patience, telling you when not to chase, and worst as precise prediction.
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