In 1946 Ralph Nelson Elliott published his famous book Nature’s Law: The Secret of the Universe.
Elliott Wave Theory is an indispensable complement to Dow’s theory.
Elliott noticed that all cycles of nature, be they tide, celestial bodies, planets, day and night, could repeat themselves indefinitely.
Because of the simultaneous presence of two different forces, one constructive and one destructive.
Dow compared his three subdivisions of the trend–primary, intermediate and minor–respectively to tides, waves, and breakwaters.
They inspired Elliott, to define his theory, by the movements of flow and reflux of the sea.
He referred to the “triple rhythm” with which the waves reach the coast.
They well knew the triple rhythm was well to the Cape Cod Coast Guard, who took advantage of the break following the third wave to pull the boats ashore.
Elliott Wave Theory argues that prices follow a repetitive rhythm of 5 upward waves (pulse waves), followed by three downward waves (corrective waves).
It forms a complete cycle is therefore by eight waves, of which 5 are upward (waves 1, 3, and 5) and three downward (waves 2 and 4).
When the five numbered waves are completed, three correction waves, identified by letters a, b, c, begin.
We subdivide each wave into waves of a lower degree, which can be divided into waves of an even more moderate degree.
Whether we subdivide a wave into five or three waves depends on the direction of the higher wave that contains it.
The Elliott Wave Theory
Thus the waves (1), (3) and (5) are divided into five waves because the wave (1), which contains them, is upward; the waves (2) and (4), which move against trend, are divided into only three waves.
To classify the various movements, we have identified specific characteristics that the multiple waves must respect. In particular:
- The second wave shall not fall below the minimum recorded during the development of the first wave.
- The third wave must be longer than the second wave and must never be the shortest of the three impulsive movements.
- The minimum of the fourth wave shall not fall below the maximum reached during the first wave.
Elliott then identified thirteen graphic configurations, found in both impulse waves and correction waves.
For a movement to be defined as impulsive, it is necessary to have five consecutive segments.
Three will be toward the primary trend and two in the opposite direction.
In an upward trend, for example, waves 1, 3, and 5 develop following the main upward movement.
The Elliott Sub-Wave
Waves 1, 3, and 5 will be breakable into five sub-waves, of which 1, 3, and 5 will be positive, while 2 and 4 will be corrective. b.
One of the main characteristics of impulse waves is an extension.
This term is used to describe the most extended wave occurring within an impulsive movement and makes up a characteristic element thereof.
We can realize the extension in one of the three waves that develop in the primary’s direction pulse (1, 3, or 5).
Often, it occurs during wave 3, although sometimes, it is visible during the movement of the fifth wave.
Movements contrary to the primary trend can take on different graphic configurations and develop into three sub-movements.
There are four corrective patterns: zig-zags, flat triangles, double and triple “ABC” formations.
They must respect the alternation rule. We base the latter on the principle that the market never acts in the same way twice in a row.
More from Finance Strategy System
Why should you use the Hull Moving Average? This article shows you the pros and cons of this fantastic indicator and how to use it with graphical examples. There are many...
Download for free the MTF MACD MT4 indicator and learn how to use it. This fantastic indicator will show the trend of 4 different time frames. The MACD is an excellent trend...