The Elliott wave principle is a form of technical analysis that traders use to analyze financial market cycles. The traders forecast market trends by identifying the extremes in investor psychology, highs and lows in prices, and other collective factors.
Elliott Wave Theory suggests that market movements follow a natural sequence of crowd psychology cycles. Patterns are created according to current market sentiment, which alternates between bearish and bullish. However, the Elliott Wave is not an indicator or trading technique. Instead, it is a theory that may help to predict market behaviour.
Ralph Nelson Elliott
Ralph Nelson Elliott was the originator of the Elliott wave theory. He studied around 75 years of market charts and data, (including yearly, monthly, weekly, daily, hourly and even half-hourly charts). He discovered a persistent and recurring pattern that operated between market tops and bottoms.
He theorized these patterns and named them “Waves”. By analyzing the waves, an analyst could forecast the market’s turns with a high degree of accuracy. After testing this theory for over four years Elliott organized his research into an essay that he titled it as “The Wave Principle”. It was published in book form in 1935.
Elliott advocated that, although stock market trends may appear random and unpredictable, they actually follow predictable, natural laws and can be measured and predicted using Fibonacci ratio.
Elliott Wave Theory was popularized in the seventies by Robert Preachter and A.J Frost with their book “Elliott Wave Principle”.
Glenn Neely revolutionized and transformed the Elliott wave theory into the most objective advanced and consistent theory in his phenomenal book “Mastering Elliott Wave”.