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The Elliott Wave Principle states that markets grow from small price movements by linking Elliot wave patterns to form larger five-wave and three-wave structures that exhibit self-similarity, applicable on all timescales. Motive waves always move with the trend, while corrective waves move against it.Įlliot Wave degrees exhibiting self-similarity (from R.H. In a bear market the dominant trend is downward, and the pattern is reversed-five waves down and three up. Corrective waves subdivide into three smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. Impulses are always subdivided into a set of five lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3, respectively. In Elliott's theory, market prices alternate between an impulsive, or motive, phase, and a corrective phase on all time scales of trend, as the illustration shows. These mood swings create patterns in the price movements of markets at every degree of trend or time scale. The Elliott Wave Principle posits that collective trader psychology, a form of crowd psychology, moves between optimism and pessimism in repeating sequences of intensity and duration. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable."
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Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles in Financial World magazine in 1939, and covered it most comprehensively in his final major work, Nature's Laws: The Secret of the Universe in 1946. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Ralph Nelson Elliott (1871–1948), an American accountant, developed a model for the underlying social principles of financial markets by studying their price movements, and developed a set of analytical tools in the 1930s.
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The Elliott Wave Principle, or Elliott wave theory, is a form of technical analysis that finance traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology and price levels, such as highs and lows, by looking for patterns in prices.