The Elliott Wave principle emerged in the 1930s after being formulated by Ralph Nelson Elliott. His theory was that, in fact, the financial markets did not behave chaotically, as previously thought, but in repeating patterns. According to Elliott, buyers’ psychology has shaped the developments in financial prices. So, significant shifts in the mindset of the masses converted into market waves.
Since, according to this hypothesis, economies have a “fractal” structure, Elliott was able to break them down. He also found, after studying them, that the trends of the stock price index have the same design. So, traders are also using the Elliott Wave Principle to forecast upcoming stock market movements.
How to interpret it ?
Anyone can understand the Elliott Wave Theory by looking at five waves traveling in the direction of the dominant trend. Then three waves will pass in a correction, culminating in a 5-3 move. This one turns into two sections. Even if the 5-3 move remains unchanged, the time period of each wave can differ.
In order to use this principle, one must realize that every price change in stock markets is accompanied by an opposite one. Therefore, the price action is separated into patterns and corrections. The first ones point to the main price course, while the latter move against the main trend.
The Elliot Wave Principle states that there are nine degrees of waves. Those are Grand Super Cycle, Super Cycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, and the Sub-Minuette.
It is worth mentioning that, even with the aid of this principle, the stock market cannot be forecast too accurately. All is arbitrary, and its proponents will sometimes want to support the usefulness of this principle. As with any other principle, it has its ups and downs. The best way to really know if it succeeds is to do it yourself and see where it takes you.
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