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Elliot Waves

Elliot Waves

4 min reading

One of the popular tools of technical analysis is Elliot Waves. Let’s dive deep into this topic together.

Elliot Waves

Elliot Waves

Brief History

After much research, it became known that the market moves in waves. For many decades, traders have been feeding on finding special market patterns that could predict the development of wave structure. Various forecasting systems have been created, and the most popular is “Elliot Waves“, named after Ralph Nelson Elliott, who was a professional accountant. In 1938 his book “The Wave Principle” was published, where the principle of robots of the theory of waves is described in more detail.

Wave development types

There are two styles of wave development: motive and corrective. Waves motive style (or motive waves *) have a five-wave structure, while corrective style (or corrective waves *) have a three-wave structure or their varieties. The driving style is the basis of both the five-wave structure and its unidirectional components, i.e. waves 1, 3, and 5. Their structures are called “driving” because they set the market in significant motion. Corrective style is at the core all pullbacks in the opposite direction that include waves 2 and 4. Their structure is called “corrective” because they can only perform partial retracement or “correction” from a move reached by any previous motive wave. So,  these two styles are fundamentally different both in their role and in their structure.

In the current interpretation of Elliott’s theory, his followers place greater emphasis on the correspondence of this theory to the psychological characteristics of human behavior. In currency and stock trading, wave theory can be used as a basis or additional tool in the structure of a trading strategy.  Most of the trading tactics using fractal principles, on which the Elliott waves are based, have excellent trade profitability indicators.

In some cases, a trader can use these Elliott waves as a prediction of the end of a trend in order to prepare for the formation of a new trend and optimize deposit management. In other situations, wave analysis is used to recognize an already formed trend and is used to confirm the forecast and a more rational market entry.

How to use it on bit4you

Elliott came to the conclusion that market movements are caused by investors’ reactions to various macroeconomic stimuli, and that upward and downward movements repeat themselves regardless of the stimulus. He also mentioned that the movement phase can be divided into several stages, or “waves.” These waves can be seen in the graph. The essence of this indicator is that it displays price movement phases (waves) as directed intervals. As a result, each wave can be classified as either an impulse (forward movement) or a correction (pullback). This and other technical analysis methods are available on the trading platform bit4you. Also, the waves can be used to determine the current state of the market at the time of the forecast. Despite the seeming simplicity of the basic principles, wave theory is one of the most difficult sections of technical analysis.

The Elliott Wave Theory is a rather complex type of analysis that takes time and perseverance before putting it into practice. Many traders use the provisions of the Wave Theory in combination with other technical analysis tools, thereby increasing the effectiveness of their forecasts.