Riding the Waves: An Introduction to the Elliot Wave Pattern

Written by: Dave Green • Thursday, September 6, 2012 • 1 min read

• Last updated: Thursday, September 6, 2012

riding elliot wave In 1940 Ralph Nelson Elliot developed the theory known as the Elliot Wave Pattern. The idea at the heart of his theory is that the activities of society are determined by the majority, or the ‘crowd’. According to Elliot’s theory, the crowd’s group psychology will govern a behavioral pattern which moves in a series of waves.

Cycles within the market are decided by a series of waves, these waves come in recurring patterns which lead to action and reaction.

Elliot did some historical research and drew the following conclusions about the market cycle:

The primary trend of the market will be carried by five waves in favor of the trend and three waves against it (also known as corrective waves).
These waves in favor and against a trend constitute a full cycle. A cycle becomes part of the next 5 – 3 wave (which will be bigger than its predecessor) which in turn joins the next etc.
The basic 5 – 3 pattern does not change and stays in place, however, the time taken for each cycle may vary.

Like many things the Elliot Wave cycle moves with the Fibonacci sequence. This is a series of numbers starting with 0, 1 where any given number is the sum of the previous two. A general rule governing the sequence is that any number in it is roughly 0.618 multiplied by the next number in the sequence; it is also roughly equal to 1.618 multiplied by the previous number in the sequence.
elliot wave

Market analyzers who subscribe to the Elliot Wave Pattern can benefit from this in two major ways. Not only can use it in order to predict the direction of the market but also the magnitude of the shift.