Below we will briefly explain each wave.
We will use the stock market as our example, because Mr. Eliot uses the wave theory to study the stock market, but really, this is not important. The wave theory is also very effective for the price movements of currency pairs, bonds, gold, oil and so on. Most importantly, Elliott Wave Theory also applies to the foreign exchange market.
The stock price initially showed an upward trend. This is usually the result of a sudden push by a relatively small number of investors (for different reasons, real or artificial speculation), this small number of investors artificially, the stock price is cheaper, so it is time to buy. This caused the stock price to start to rise.
Entering this stage, a considerable number of investors who chose to buy before thought that the stock price was somewhat overvalued and chose to take profits. This led to a fall in stock prices. However, the stock price did not fall below the previous low, because investors thought it was time to buy again after the stock price went through a correction.
Wave 3 is usually the longest and strongest of the 5 waves. The stock has received the attention of most investors in the market. More investors have discovered the investment value of the stock and intend to buy it. This also prompted the stock to keep rising. Waves in this band usually exceed the height created by the end of wave 1.
Investors once again chose to take profit at this stage because they once again believe that the stock price is overvalued. However, the correction of this wave is relatively weak, because a relatively majority of investors in the market are still optimistic about the stock’s prospects and intend to buy on dips.
At this stage, the vast majority of investors in the market extend their investment tentacles to the stock, and the stock price is also sought after by the market fanatics. You will usually see that the CEO of the company usually appears on the cover of a well-known financial magazine as a person of the year. Traders and investors began to chase the stock crazy, and when someone disagrees with them, they will start a strong rebuttal. At this time, the value of stocks is also the most serious stage of overestimation. Opponents in the market began to short the stock, so the ABC correction wave appeared.
One thing you need to know about Eliot’s wave theory is that there is always one of the rising waves (1, 3, 5 waves) that is an extended wave. In other words, there is always a certain wave length that is longer than other waves Two waves.
According to Eliot, the fifth wave is longer than the first and third waves. But over time, the market’s perception of this view has changed, and now more people believe that the third wave is the extension wave.
After the exchange rate experienced a round of driving waves, there were three wave callbacks. This time we use letters instead of numbers to mark the callback wave. As shown below.
Just because we use the rising market as an example of our explanation of Elliott wave theory does not mean that Elliott wave theory is not applicable to the falling market environment. The same 5-3 wave pattern can also be this trend: