The Elliott Wave Principle

he Elliott Wave Theory was first discovered in the late 1920s by Ralph Nelson Elliott. He discovered that the "market" does not behave in a chaotic manner; instead, it moves in repetitive cycles, which actually reflect human actions, reactions and emotions caused by exterior influences such as news, whether good or bad, rumors, economic situations, etc. His theory stated that "the ebb and flow of mass psychology" always unfolds in the same basic repetitive patterns.

Fractals are mathematical structures where one object is made up of exactly the same object, only smaller. These smaller objects are in turn made up of exactly the same object, only smaller still, and so on, and so forth. The patterns that Elliott discovered are built in the same way. An impulsive wave, which flows in the direction of the main trend, always shows five waves in its pattern. In turn, each of these impulsive wave is made up of five smaller waves. In this smaller pattern, the same pattern repeats itself ad infinitum. These ever smaller patterns are labeled as different wave degrees in the Elliott Wave Principle. Aside from these repeating patterns, Elliott also studied the Fibonacci numbers, and how they apply to these patterns.

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