Elloitt Wave Theory

#1
Hi friends! I am new at this site. I found it very helping site. Please can any one make me understand the Elliott Wave Theory in simple wording. I have studied many sites. But I can't make out.
 

Alchemist

Administrator
Staff member
#2
What kind of answer do you expect for your question?

Elliot Wave Theory is not something that can be explained in 2-3 lines. :).

Elliot Wave Theory simply states that stock markets (indices) move in certain recognizable patterns.

The theory is based on observations and there is no logical explanation to why such patterns should occur in stock markets.
 
#3
Elliot Wave Theory

It is difficult to explain The Wave Principle in a forum; and also I dont know how much you can make of a verbal discussion...but the topic is of a lot of interest to me, so i'll try ...According to the theory developed by Ralph Nelson Elliot, the market moves in specific pattern known as 'waves' in technical analysis. The basis of this principle is that human behavior follows a rhythmic pattern and this is reflected in their actions & decisions too.
 
#4
Elliot Wave Theory - Crowd Psychology

The Elliot Wave Theory is based on the premise that collective investor psychology moves from optimism to pessimism and back to optimism. These mood swings are reflected in market behavior as patterns in price movement at every degree of a trend. The principle says that market prices alternate between 5 waves and 3 waves within a trend. The first, third & fifth waves are motive waves that move within the trend and the second & fourth are corrective waves that move against the trend. Each motive wave is further divided into 5 waves and each corrective wave into 3 waves both representing a further subtrend.
 
#5
Elliot Wave Theory - Bull Phase & Bear Phase

In a bull phase, the first, third & fifth wave are upward moving and second & fourth waves are downward moving giving the broader trend an upward move. The bear phase is just the opposite. The first, third and fifth waves are downward moving whereas the second & fourth waves are upward moving. This gives the broader trend a downward move.
I could explain this better on a chart, but unfortunately, I don't have one at the moment.
 
#6
Elliot Wave Theory - Dominant Trend - Wave I

In a dominant trend, Wave I, at the beginning is the hardest to identify as it is the start of a long major uptrend. Fundamental news flow is negative and sentiment is bearish. The only indicator is a slight rise in volumes after along standstill but it is not very prominent.
 
#7
Elliot Wave Theory - Dominant Trend - Wave II

Wave II is the correction after Wave I but the correction should not extend below the starting point of Wave I. Also the Wave II retracement should not be below 61.8% of the Wave I gains. In this phase, the fundamental scenario is the same as of Phase I.
 
#8
Elliot Wave Theory - Dominant Trend - Wave III

Wave III shows the largest up move as investor sentiment gets a boost and the crowd pours in. The gains of Wave III to that of Wave I is in the ratio of 1.618:1 approximately. It is difficult to seize the opportunity of a dip in prices to enter the markets.
 
#9
Elliot Wave Theory - Dominant Trend - Wave IV

Wave IV again is a corrective phase of Wave III. Prices correct sideways and by the end of the phase retraces about 38.2% of Wave III. For those who have missed the bus in Wave III this is the opportunity to enter the markets.
 
#10
Elliot Wave Theory - Dominant Trend - Wave V

Wave V is the last leg of the uptrend. There is a sense of euphoria in markets and investor sentiment is very strong. The ordinary investor buys in at this stage. Volumes are lower than that of Wave III and that is an indicator that the trend will change.
 
#11
Elliot Wave Theory - Corrective Trend - Wave A

Wave A is the beginning of the corrective trend; the fundamental news is still positive. Prices move slightly lower with slight increase in volumes. Some indicators include rising volatility in options market and higher open interest in future markets, but these are very subtle.
 
#13
Elliot Wave Theory - Corrective Trend - Wave C

In Wave C prices move much lower with heavy volumes. As large as Wave A, Wave C sometimes extends to about 1.618 times Wave A. The bear market story is established among investors, as they continue to sell at very low prices.
 
#14
Elliot Wave Theory

There is not much in the Elliot Wave theory by way of logic...there are plenty of criticisms to this theory as well...the reason it became popular was that it aided in getting an idea of the long term trend. But simpler techniques like DMA/EMA are much better indicators.
 

Atiker

Active member
#15
There is not much in the Elliot Wave theory by way of logic...there are plenty of criticisms to this theory as well...the reason it became popular was that it aided in getting an idea of the long term trend. But simpler techniques like DMA/EMA are much better indicators.
Information is good. Thanks for updating. But it would have been better if all these small updates were put in a single comment for readability.
 
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