Background
Ralph Nelson Elliott (1871-1948) developed Elliott Wave Theory in the 1930s — the idea that market prices unfold in specific, repeating wave patterns driven by crowd psychology. The theory posits that markets move in 5-wave impulse patterns (in the direction of the trend) followed by 3-wave corrective patterns (against the trend). His work was popularised by Robert Prechter in the 1980s.
Core Methodology
Elliott Wave Theory states that markets are fractal — the same 5-3 wave pattern repeats at every timeframe from minutes to decades. Impulse waves (1-2-3-4-5) move in the direction of the larger trend, while corrective waves (A-B-C) move against it. Each wave has specific rules and guidelines for identification. The waves also relate to Fibonacci ratios (wave 3 is often 1.618× wave 1, etc.).
Key Trading Rules
- 5-3 pattern: impulse waves have 5 sub-waves (1-2-3-4-5), corrective waves have 3 sub-waves (A-B-C)
- Wave 2 never retraces more than 100% of Wave 1. If it does, the count is wrong.
- Wave 3 is never the shortest impulse wave — it's usually the longest and strongest
- Wave 4 should not overlap with the price territory of Wave 1 (except in diagonal triangles)
- Use Fibonacci retracements for Wave 2 (typically 50-61.8% of Wave 1) and extensions for Wave 3 (161.8% of Wave 1)
- Corrections are the hardest part — they come in flats, zigzags, triangles, and complex combinations
Key Concepts
Books & Resources
Elliott Wave Principle by Frost & Prechter (the definitive guide). R.N. Elliott's original writings. ElliottWave.com (Robert Prechter's service).