Elliott Wave Theory
Updated on March 7, 2023
The Elliott Wave Theory is a technical analysis tool used in finance and investing that attempts to forecast market trends by identifying and analyzing recurring patterns in market data. The theory was developed by Ralph Elliott in the 1930s and is based on the idea that market trends, including stock prices and other financial instruments, follow predictable patterns, which he referred to as waves.
What are the different types of waves identified under Elliot Wave Theory?
The Elliott Wave Theory identifies three types of waves,
Impulse waves, which are composed of five waves in the direction of the trend, and indicate that the trend is continuing.
Correction waves, which are composed of three waves in the opposite direction of the trend, and indicate that the trend may be changing.
Triangular waves, which are composed of five or more overlapping waves that result in a market consolidation.
The Elliott Wave Theory posits that prices follow a natural rhythm of growth and retrenchment, and that this rhythm can be used to identify the beginning and end of market trends. By recognizing these patterns, traders can gain a better understanding of the market’s direction and make informed trading decisions.