Forex Elliot Wave Theory (1)
Elliot Wave or Elliot wave theory is one of the most popular Price Action (PA) patterns. Often used by professional and experienced traders and even by many high-end fund managers. The Elliot Wave is not an easily readable pattern with absolute clarity in the current time. What Elliot Wave provides is a good RRR opportunity to enter the market in the direction of the trend.
The Elliot Wave principle was introduced by an accountant named Ralph N. Elliot in the early 20th century. This principle is closely related to the Dow theory. Elliot studied the historical movement of the Dow Jones Average and noticed a recurring cyclical pattern he first described in a booklet entitled The Wave Principle in 1938 and described in Nature’s Law: The Secret of the Universe in 1946. Elliott identifies this as a natural cycle in a collection of investor psychology, or the psychology of the crowd, moving from optimism to pessimism and repeating itself and that is reflected in the price graph.
In Elliott’s theory, market prices move in a recurring wave pattern, a term borrowed from Dow Jones that equates stock price movements to the tide of the ocean waves. Elliott wave patterns alternate between the five waves, the so-called motive phases, and three waves of counter-trend movement called the corrective phase. The five waves in the motive phase are labeled with numbers 1, 2, 3, 4, and 5, while the three corrective phase waves are labeled letters A, B, and C.
The first wave in the motive phase, wave 1, moves toward a developing trend only to be interrupted by a wave-labeled counter-trend movement. 3 Wave continues the trend and is often the strongest wave but also disrupted by the counter-trend movement in wave 4. Finally, wave 5 moves to near the end of the trend. Followed by three waves in the corrective phase as wave A marking the end of the previous trend. Wave B tries to reestablish the previous trend but fails because wave C re-moves against the previous trend.
In this way, five phase wave motifs and three corrective phase waves are combined to form a complete cycle.