ELLIOTT WAVE PRINCIPLE
The Elliott Wave Principle is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns.
One of the easiest places to see the Elliott Wave Principle at work is in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify repeating patterns in prices, and figure out where we are in those repeating patterns today, you can predict where we are going.
Using the Elliott Wave Principle is an exercise in probability. An Elliottician is someone who is able to identify the markets structure and anticipate the most likely next move based on our position within those structures. By knowing the wave patterns, you’ll know what the markets are likely to do next and (sometimes most importantly) what they will not do next. By using the Elliott Wave Principle, you identify the highest probable moves with the least risk.
ELLIOTT WAVE PATTERN (Motive and Corrective waves)
Elliott’s pattern consists of motive waves and corrective waves. A motive wave is composed of five subwaves and always moves in the same direction as the trend of the next larger size. A corrective wave is divided into three subwaves. It moves against the trend of the next larger size.
A picture above shows, these basic patterns build to form five and three-wave structures of increasingly larger size (larger “degree,” as Elliott said).
Waves 1, 2, 3, 4 and 5 together complete a larger impulsive sequence, labeled wave (1). The impulsive structure of wave (1) tells us that the movement at the next larger degree of trend is also upward. It also warns us to expect a three-wave correction — in this case, a downtrend. That correction, wave (2), is followed by waves (3), (4) and (5) to complete an impulsive sequence of the next larger degree, labeled as wave 1. At that point, again, a three-wave correction of the same degree occurs, labeled as wave 2.
Note that regardless of the size of the wave, each wave one peak leads to the same result a wave two correction.
Within a corrective wave, subwaves A and C are usually smaller-degree impulsive waves. This means they too move in the same direction as the next larger trend. (In Figure 2 below, waves A and C are in the same direction as the larger wave (2).) Note that because they are impulsive, they themselves are made up of five subwaves. Waves labeled with a B, however, are corrective waves; they move in opposition to the trend of the next larger degree (in this case, they move upward against the downtrend). These corrective waves are themselves made up of three subwaves.
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