What is Elliot wave theory

Elliot wave theory was founded and developed by a business expert accountant by trade Mr. Ralph Nelson Elliot.

It was by late 1930’s when he was forced to retire due to a serious illness. Despite of his illness, Nelson Elliot did not give up on his dream so he spent most of his time studying and observing stock markets and their charts with a hope of understanding the market behavior.

From his analysis while studying stock market charts covering almost 75 years, Elliot concluded that the market is not rational.

The  continuous change in stock market prices is due to the basic harmony found in nature. He discovered that the crowd behavior trends and reverse patterns occurred in a repetitive form on the charts.

He simply explained these happenings that people rarely change their behavior. They tend to be the same over and over regardless of the news and most dependable events. He went further,illustrated these patterns and named them waves.

His belief was that since the same things always happen in the market, traders can be able to identify these patterns in the trending market price charts and be able to tell where price will be going next.

He further described how these patterns can be linked together to form larger versions of the same patterns.  Small patterns form large patterns then larger; the process is continuous till the next largest size but identical.

The Elliot wave theory helps investors, and traders to know how the market behaves from the point of pessimism to the point of optimism; changes in human  psychological orientation. This makes it easy for traders to identify potential areas where price is most likely to reverse.

That was awesome; finally things were made right. You just have to look for only two points; weak and strong.

From his judgments, behind every success, there is always a weakness at the beginning which may be fear or doubt. True or false? All this was finally rapped up and the Elliot Wave Theory was born.

The basics of the Elliot wave theory.

Elliot observed and noted the power struggles in the market caused by the market participants.

As the market progresses, price tries to find its trend but never fails to meet struggles that sometimes make it divert from its direction. This kind of zigzag or up and down movement was officially named by Elliot as a wave like movement.

He then finally concluded that this kind of behavior appears in two different forms on a market chart; The impulsive move and the corrective move.

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