Eliot Wave Theory

Let’s go back to the 1920s and 1930s, when there was a crazy genius, his name was Ralph Nelson Eliot.

Through intensive research on the data of the Dow Jones Industrial Average over the past 75 years, Eliot found that although it seems that the stock market shows a certain degree of unnecessary volatility at first glance, in fact, the changing stock price structure reflects natural harmony. beauty of.

When Eliot was nearly 66 years old, he eventually collected the most sufficient evidence and gained enough confidence to share his findings with the world.
Eliot published his theory in The Wave Principle.

In Eliot’s view, the market presents a process of repeated cycles. He pointed out that this process of change is caused by changes in the sentiment of investors caused by external factors, or was influenced by the dominant psychology of the market at that time.

Eliot explained that the upward and downward price fluctuations are caused by the collective psychological state of the market, and this kind of psychology is always reflected in the repeated pattern.

He called the upward and downward price fluctuations “waves”.

Eliot believes that if you correctly judge the establishment of the trend, then, correspondingly, you can predict when the trend is established and when the trend ends and the next direction of price fluctuations.

This is why Elliott Wave is so attractive to investors. Eliot’s theory teaches investors a way to identify the precise node of price movements. At this node, the possibility of a price movement reversal is very high. In other words, Eliot has established a system that allows traders to capture the top and bottom of the market.

So, did Eliot find the rules in unnecessary price fluctuations?

However, before we start to study the Elliott waves, you first need to know what is fractal.

Fractal

Simply put, fractal is a structure that can be subdivided into smaller parts, and each smaller part is very similar to its entire structure. Mathematicians call this property “self-similarity”.

In fact, examples of fractals are not far away from us, they are everywhere in nature.
Sea shells, snowflakes, and clouds all have a fractal structure. Of course, lightning also has a fractal structure.
So why is fractal so important?
An important characteristic of the Eliot wave is its fractal structure. Like sea shells and snowflakes, Elliott waves may be further subdivided into similar smaller levels of Elliott waves.
So, now let’s start to study Elliott waves!

5-3 wave form

Eliot believes that the market fluctuates in a 5-3 wave pattern.

The first 5 waves are called push waves.

The last 3 waves are called adjustment waves.

In this pattern, the first, third, and fifth waves are rising waves, meaning that they are consistent with the overall upward trend, while the second and fourth waves are callback waves.

Here, we have to remind that the 2, 4 waves and the ABC adjustment pattern are mixed, and we will discuss this in the next lesson.

Let us first look at the driving wave pattern.

Looking at the graphics, are you still confused? Don’t worry, let’s colorize the different waves. Is it better to look like this?
Wow! It’s so beautiful! Look, after we represent each wave in different colors, the morphological process is more vivid.