What is Elliott Wave Theory? |
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What is Elliott Wave Theory?

January 25, 2019

Elliott Wave Theory was created by Ralph Nelson Elliot in the year close to 1930s. According to Elliott popular belief that stock markets, in fact, traded in cyclical patterns, usually thought to behave in a somewhat haphazard and disordered manner. In here, we’ll take a quick peek at the past behind Elliott Wave Theory and how it is applicable in stock trading.

What Elliott anticipated that trends in financial value resulted from investors mind frame or psychology. He found that behavioral changes in mass psychological opinion always reflected in the same repetitive fractal patterns, or “waves,” in financial markets.

Theory of Elliot’s to some extent is similar to the Dow Theory. In both of these, they identify that stock prices move in a wave. However Eliott furthermore recognized the “fractal” temperament of markets, he was able to break down and evaluate them in much greater specifics. Mathematical structures, which on an ever-smaller scale considerably repeat themselves, are called Fractals. Elliott discovered stock index price pattern was ordered in the same way. For future market moves, he then began to look at how these repeating patterns so that it could be used as predictive indicators.

Elliott made through stock market predictions based on consistent and dependable features he discovered in the wave patterns. The wave which flows in the same direction as the larger trend always shows five waves in its pattern is called an Impulsive wave. On the other hand, the wave that net travels in the opposite direction of the main trend is a corrective wave. Within each of the impulsive waves, on a smaller scale, five waves can again be found.

This next pattern replicates itself ad infinitum at ever-smaller scales. Only decades later scientists recognized fractals and demonstrated them mathematically even when Elliott uncovered this fractal structure in financial markets in the 1930s.

Price action is divided into trends and corrections. In worlds every stock markets, we know that “what goes up, must come down,” as a price movement up or down is always followed by a contrary movement. Trends show the major direction of prices, while corrections move against the trend.

About the Author

Author of this article is a modern thinker and stock market analyst. He is a CEO in PTA Coaching and teaches stock market courses for beginners.

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