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What is the Elliott Wave Theory?

What is the Elliott Wave Theory?

Elliot Wave Theory incorporates the natural cycles of nature and waves with market movements in an attempt to explain and predict the historical and future prices of stocks.

Penned by Ralph Elliott in the early 20th century, the Elliott Wave Theory attempts to organize the seemingly random behavior of the market into cycles. The theory visualizes a series of waves cycles, each representing a different length of time or magnitude of a trend or cycle.

The idea is that using the combined math of these various-sized waves, one can predict where another wave will be in its cycle. This has to do with the theory of fractals and market harmonics. Some cycles are as much as 100 years long, some are as short as a few minutes.

Elliot looked at naturally occurring cycles in nature and used them as the basic for his model of the market, which, given its random and organic behavior, seems like a natural force itself. It is driven largely by the individual actions of investors, acting in concert (or cacophony).

One of the main ideas, which is only a basic one as far as the entire theory goes, is that there will be 5-wave impulse sequences along with 3 wave corrective sequences. The ratios of sequences are used to predict when reversals and corrections might occur.

It all goes well into the weeds and while some traders immerse themselves in Elliot Waves, some detractors suggest there isn’t much evidence that there is a truly successful strategy to be extracted from it.

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Keywords: trend analysis, cycles, stock price, trend reversal, chart analysis, Elliot Waves, Elliot Waves Theory,