Elliott Wave About

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Elliott Wave Theory was discovered by Ralph Nelson Elliott in the 1930’s. He
came to the conclusion that the markets don’t move in random movements and
that directional changes have a correlative relationship with other
directional movements in many different time frames. His methods can explain
all the movements of any market in history. This gives the Elliottician a better
understanding of the future direction of the market.

Basically markets move five waves in the impulsive or motive direction and
three waves in the corrective direction. The drawing below shows how this
basically looks.

that waves 1,3 and 5 are motive. Moving in the direction of the trend for
the entire five wave move. Waves 2 and 4 are corrective and usually don’t
violate the starting point of the previous motive wave. Elliott Wave Theory

Wave 1
The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.

Wave 2
At this point enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.

Wave 3
This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.

Wave 4
People take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips”.

Wave 5
This is the point that most people get on the stock, and is most driven by hysteria. You usually start seeing the CEO of the company on the front page of major magazines as the Person of the Year. People start coming with ridiculous reasons to buy the stock and try to choke you if when you disagree with them. This is when the stock becomes the most overpriced. Contrarians start shorting the stock which starts the ABC pattern.

Via BabyPips.com and Shepwave.com