Elliott Wave Principle - Elliott Wave International (2024)

FAQs

What is the principle of the Elliott wave? ›

The theory

Elliott believed that every action is followed by a reaction. Thus, for every impulsive move, there will be a corrective one. The first five waves form the impulsive move, moving in the direction of the main trend. The subsequent three waves provide the corrective waves.

A correct Elliott wave count must observe three rules: Wave 2 never retraces more than 100% of wave 1. Wave 3 cannot be the shortest of the three impulse waves, namely waves 1, 3 and 5. Wave 4 never enters the price territory of wave 1.

Key To Market Behavior. First published in 1978, Elliott Wave Principle is one of the most popular market analysis books ever published. Amazon reviewers say, “Still the Classic and Essential Text for Elliott Wave Trading” and “This is the bible of the theory.”

The top traders only have a 35% - 55% success rate. They end up profitable because they trade long term (the reward/risk ratio can be much higher).

Trading with Elliott Wave Theory

In a bull case, traders look for opportunities to buy during corrective waves within an uptrend (for example, Wave 2 or Wave 4), aiming to ride the next impulsive wave to higher highs.

Therefore, while Elliot Wave theory provides a structured framework for market analysis, its reliability can vary depending on individual interpretation, market conditions, and the trader's proficiency in applying its principles.

To trade Elliott waves, you first determine whether your market is in a bull or bear trend, and then whether it is in the motive or corrective phase of the pattern. From there, you can work out which wave the market is currently in and make predictions about where it might head next.

Simply put, movement in the direction of the trend is unfolding in 5 waves (called motive wave) while any correction against the trend is in three waves (called corrective wave). The movement in the direction of the trend is labelled as 1, 2, 3, 4, and 5. The three wave correction is labelled as a, b, and c.

To use the theory in everyday trading, a trader might identify an upward-trending impulse wave, go long and then sell or short the position as the pattern completes five waves and a reversal is imminent.

Ralph Nelson Elliott (28 July 1871 – 15 January 1948) was an American accountant and author whose study of stock market data led him to develop the Wave Principle, a description of the cyclical nature of trader psychology and a form of technical analysis.

What is the best time frame for Elliott Wave? ›

What timeframe is best for Elliot Wave? There is no best timeframe for trading the Elliot Wave strategy. It depends on your trading style and personality. If you are a day trader, you would want to trade on intraday timeframes, such as hourly, 30-minute, 15-minute, and so on.

If you want to use only Elliot wave then success rate will be very less. I used these techniques along with Candlestick chart patterns and my prediction were right for 70-80% of the time.

On the other hand, NEoWave goes beyond the teaching of Elliott Wave principles. Glenn Neely's NEoWave analysis techniques offer a logical, scientific, and objective approach to Wave forecasting.

In this case, these waves can be considered more as confirmational patterns than patterns used to identify a trend. The Moving Average Convergence Divergence (MACD) is one of the most popular indicators to pair with Elliott Wave analysis and is especially helpful to beginner traders.

The Elliott Wave indicator can help you identify impulse waves that establish the direction of the trend and corrective waves that retrace the trend. The indicator can also help you measure the strength and duration of each wave, as well as the potential reversal points.

The Elliott Wave Theory suggests that stock price movements can be reasonably predicted by studying price history as the markets move in wave-like patterns driven by investor sentiment. Like ocean waves, the movements are repetitive, rhythmic, and timely.

The Wave Principle is Ralph Nelson Elliott's discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature.

Elliott Wave Theory Assumptions

The masses consistently overreact and will make things over and under priced consistently. This was, and until recently, in direct opposition to prevailing theories that the market place was an efficient mechanism.

principle of superposition, in wave motion, the principle that when two or more waves overlap in space, the resulting disturbance is equal to the algebraic sum of the individual disturbances. This principle holds for many different kinds of waves, such as waves in water, sound waves, and electromagnetic waves.