Elliott Wave Theory: What is it?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Long before the birth of Pythagoras and Plato, the legendary Hermes Trismegistus stated in his treatises that the principle of rhythm operates everywhere in our life. Ups inevitably give way to downs, joy to sadness, day to night, etc. Nowadays, many economists are convinced that this rule also works in economics, and the Elliott wave theory, which has repeatedly proved its worth in practice, is a convincing proof of this. Thanks to her, many traders manage to make decent money on the currency and stock exchanges, and since many are now interested in home-based earnings, it makes sense to get to know her better.

Elliott Wave Theory: the essence and reason for its popularity

According to this system, developed back in the 30s of the last century, any assets on the market are traded in repeating cycles that arise due to emotions andtraders' feelings as a result of the release of important news or under the influence of the dominant mood of the majority at any particular moment in time. The Elliott wave theory states that price fluctuations do not occur randomly, but according to certain patterns, and describes in detail graphic formations that allow you to determine both the direction of the future trend and the expected reversal point. Experienced investors have long understood how important Elliott's wave theory is for trading - R. Elliott's book "The Wave Principle", which describes its basic rules, has long become a desktop reference for many analysts and practicing traders. After its appearance in the price confusion in the markets, order began to be seen, which allowed economists to make fairly accurate forecasts of future scenarios. The main advantage of this theory is that it is universal and can be used within almost any time period. For comparison, we note that the Kondratiev wave theory considers cycles of 40-60 years, which significantly narrows the scope of its practical application.

Basics of the Elliott System

As part of this exercise, it was possible to find out that any trend price movement can be divided into five sections, which are called waves. At the same time, three of them are directed in the direction of the main movement, and two - in the opposite direction. Elliott wave theory describes in detail the rules by which, with an accuracy of 90%, you can determine which account onat the moment, the wave is developing its movement, and the Fibonacci coefficients help to find the final point of its completion. At the same time, the principle of fractality (self-similarity) is preserved on any part of the trend.

This means that any wave (in more detail) is also divided into five components: three impulse waves and two corrective ones. The accuracy of the forecast, according to this theory, directly depends on the time period: the longer it is, the more accurately the rules work. At the same time, due to fractality, the underlying principle often shows up even on the shortest-term charts.