Basic Elliott wave theory- essential concepts

Introducing: Ralph Nelson Elliott (1871�1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles in Financial World magazine in 1939. The wave principle is dicovery that social or crowd, behavior trends and reverses in recognizable patterns. Using stock market data as his main research tool, Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature.

Until now, the Elliott wave theory is still one of the famous forcasting tools of the price movements. At now, one of the best research about elliott wave you can refer detail on "Elliott wave principle" Robert Prechter's books, search it on google.

The analysing system of elliott wave base on the wave patterns he discovered, at first we must understand the structure and the rules of the waves:

The five wave pattern, and the cycle:

The movement of the prices take the form of five waves of specific structure; Three waves of them, which are labeled 1,3,5 called impulse or motive wave, it indicates the direction of the trend, they are seperated by 2 countertrend interruptions, which are labelled 2 and 4, called corrective wave ( partial retracement).

"R.N. Elliott did not specifically state that there is only one overriding form, the "five wave" pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five wave pattern at the largest degree of trend. Because the five wave pattern is the overriding form of market progress, all other patterns are subsumed by it." - cited in Robert Prechter' book.

The rythm of five wave up and three wave down makes the complete cycle of eight waves. '1,2,3,4,5' is motive phase, and 'a,b,c' is corrective phase. Every wave can be subdivided to smaller wave, the image below will illustrate the cycle:

The wave degree can be subdevided into: grand cycle, supercyle, cycle, primary, intermediate, minor, minute, minuette.

Next post will introduce some basic rules of each wave types