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  5. Elliott Wave Theory: An Overview

Elliott Wave Theory: An Overview

Elliott Wave Theory: An Overview

Elliott Wave Theory, Elliott Wave Principle, Elliott Waves or simply the Wave Theory, was discovered by Ralph Nelson Elliott.

Ralph Nelson Elliott identified thirteen patterns that frequently occur in financial markets but are not recurring in terms of time or magnitude.

In short, Elliott’s theory is about price patterns and explains where these patterns are likely to occur.

Although the Elliott Wave theory gives us a tremendous amount of knowledge about the current position within the financial market framework, accordingly, the possible scenario for the next movement. At the same time, while Elliott Wave Theory is not primarily a forecasting tool, it is the best tool available to traders and investors.

Market movement, as seen by Elliot

The Elliott Wave theory is based on the fact that when a large group of humans come together, they act as a herd rather than an individual.

Ralph Nelson Elliott began his theory by observing the psychology of human society, and trying to apply it to the financial markets.

The herd concept in Elliott Wave theory occurs when people are influenced by their peers to adopt specific behaviour and follow trends without central guidance.

When several characteristics and instincts come together in a person, which significantly affects the course of his life and his orientations, and among these instincts, we find fear, greed and the desire to survive.

We fear what we do not know, crave more of anything we expect to be positive, and enter wars to survive.

Elliott Wave Theory, in short, when traits combine to create what is known as (herd psychology), a behaviour based on unjustified imitation that stems from the unconsciousness of the human psyche. Humans of different colours, races, and religions agree on these characteristics and share similar reactions to similar events as long as they relate to fear, greed, and the desire to survive.

How did Elliott Wave theory develop?

Fear is one of the basic human emotions, and it’s the word we use to describe our emotional reaction when we feel dangerous or insecure

The wave theory accurately, in front of significant risks, the immediate reactions may differ, but we remain in agreement in the instinct of fear as a common factor in the human psyche in the face of any imminent danger, and this fear stems from the desire to survive, which soon disappears, and we find a state of optimism that leads to a state of Desire for more optimism

Ralph Nelson Elliott analysed the Great Depression of the 1930s and, through his data analysis, made startling discoveries that laid the groundwork for new ways of analysing financial markets.

Ralph Nelson Elliot translated this psychological cycle into models formed by the market, which are constantly repeated and predictable. Hence, models appeared for waves and applied these models to the financial markets that are controlled by the human soul and which are subject to the factors of supply and demand.

Market movement philosophy

After years of follow-up and careful examination, Elliott concluded that the markets move in waves. The Elliott wave theory identifies two types of waves. The price is in the general direction, followed by three waves reversing the trend, and I call it the corrective wave, which is noticeably affected by the Dow theory.

It is a powerful system used by investors, traders and financial professionals around the world, giving them a competitive edge over their peers. The main goal of following this philosophy is to determine whether a market is in an uptrend, downtrend or consolidating sideways. Combined with other forms of technical analysis (i.e. candlestick charting), one can develop a robust strategy that can increase their potential to earn long-term profits while limiting risk simultaneously.


The Elliott Wave Theory is one of the most used theories regarding understanding market movements. Developed by Ralph Nelson Elliott in the 1930s, this theory states that collective investor psychology moves markets in predictable waves. When these waves are identified correctly asset prices can be forecasted.

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