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Elliott Wave Principle

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The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle", and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller.

In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s. When investors and traders first discover the Elliott Wave Principle, there are several reactions:

- Disbelief that markets are patterned and largely predictable by technical analysis alone
- Irrational Exuberance at having found a crystal ball to foretell the future
- And finally the correct and useful response: Wow!, here is a valuable new tool I should learn to use

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature's patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions and, as recent discoveries have confirmed, in market prices.

Natural systems, including Elliott wave patterns in market charts, grow through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this punctuated growth appears in market data is only natural as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, Everything that thrives must have setbacks.


The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: impulse waves, and corrective waves.

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

Corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle ... so, don't let your Elliott Wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

General Elliott-Wave paraphernalia ...

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#256   FWIW My weekly chart of the SPX rayrohn 01/24/11 07:11:17 PM
#255   Prechter's Deadly Bearish Big Picture: sumisu 06/18/10 05:37:17 PM
#254   Dow Slumps 3.6%: "We Are On Schedule for sumisu 05/21/10 03:40:53 PM
#253   oh, ok .. thanks! ... here's another source blasher 03/30/10 09:47:53 AM
#252   >Not yet a member; you have to be sumisu 03/30/10 08:11:05 AM
#251   Fibonacci Techniques for Math Geeks -- and Everyone sumisu 03/30/10 08:07:07 AM
#250   How to Flee the Flock . . . blasher 03/28/10 03:40:28 PM
#249   Why Most Financial "Truisms" Are False blasher 03/25/10 04:39:47 PM
#248   Learn Elliott Wave Analysis -- Free blasher 03/10/10 10:56:17 PM
#247   This Free Report Helps You Improve Your Trading blasher 03/07/10 04:12:53 PM
#246   read more at . . . blasher 02/24/10 11:38:59 PM
#245   Same Day. Same Event. Same Market. Different Story! sumisu 02/24/10 04:33:01 PM
#244   Bob Prechter Points Out The Many Signs Of Deflation sumisu 02/20/10 02:13:44 PM
#243   Once each year or so, our friends at blasher 02/17/10 11:30:23 AM
#242   It's FreeWeek at Elliott Wave International! blasher 02/04/10 09:12:02 PM
#241   Bernanke's Burn Notice -- Why Now? sumisu 01/29/10 10:59:08 AM
#240   For those who like Trading Options . . blasher 01/28/10 09:59:45 PM
#239   Thanks! 'sumisu'. /e blasher 01/22/10 08:50:47 AM
#238   Bob Prechter: The Bear Market Is Back sumisu 01/21/10 10:27:46 PM
#237   A new Post about Individual Investors and what blasher 12/22/09 09:57:37 AM
#236   Change the Way You Invest Forever With 10 blasher 11/27/09 07:44:14 PM
#235   Free 42-Page eBook: Find Trading Opportunities With Fibonacci blasher 11/25/09 09:33:45 AM
#234   Awesome! new Post (FREE) about the US Dollar action: blasher 11/09/09 11:31:42 PM
#233   FREE Week at Elliot Wave . com . blasher 11/04/09 08:32:48 PM
#232   exactly. thanks! /e blasher 11/04/09 09:50:52 AM
#231   Impulse wave rayrohn 11/04/09 09:48:58 AM
#230   yes, I agree . . but that is blasher 11/04/09 09:44:37 AM
#229   lol Me too most of the time my rayrohn 11/04/09 09:39:14 AM
#228   I don't see an overlap except slightly in blasher 11/04/09 09:25:42 AM
#227   Wave 4 cannot overlap wave 1, except in rayrohn 11/04/09 08:02:45 AM
#226   here is my eWave Chart for QQQQ . blasher 11/04/09 07:07:36 AM
#225   great new article posted here: blasher 10/29/09 09:40:11 PM
#224   SPY is just below the 61.8% retracement (105.20) blasher 10/28/09 02:03:06 PM
#223   >Thanks, I need a bounce! sumisu 10/28/09 12:28:00 PM
#222   QQQQ is at its 61.8% retracement level blasher 10/28/09 12:13:49 PM
#221   lol NO rayrohn 10/25/09 08:39:31 PM
#220   LOL . . I used to be a blasher 10/24/09 12:50:59 PM
#219   OT: good link. sumisu 10/24/09 09:40:36 AM
#218   Do you notice all of the Bullish headlines blasher 10/23/09 12:33:27 PM
#217   nice .. I'll study that in my spare blasher 10/21/09 02:04:31 PM
#216   lol yes probably but I been playing around rayrohn 10/21/09 01:26:53 PM
#215   Lucas Numbers! . . LOL . . . blasher 10/21/09 01:23:20 PM
#214   so is the SPX .... rayrohn 10/21/09 01:17:38 PM
#213   QQQQ is at key Fib level now . blasher 10/21/09 12:15:40 PM
#212   nice catch! . . . yes, sure does blasher 10/20/09 11:13:44 PM
#211   the CRB index broke out of a ascending rayrohn 10/20/09 07:40:58 PM
#210   With this morning's Inflation numbers (PPI) continuing blasher 10/20/09 04:09:37 PM
#209   I'm starting to Post Elliott Wave stuff blasher 09/27/09 08:21:02 PM
#208   A Lesson in Drawing and Using Trendlines sumisu 09/26/09 06:12:28 PM
#207   Good article about Trend-lines . . . ... blasher 09/24/09 09:28:40 PM