The Elliott Wave principle is a technical analysis of stock and commodity trends, based on crowd psychology and social trends. It divides market cycles into Impulse and Corrective Waves, with five and three wave structures respectively, following a fractal pattern. The principle is widely accepted and reliable, with Ralph Nelson Elliott credited with formulating it in the 1930s.
The Elliott Wave principle is a form of technical analysis of stock and commodity financial market trends versus the similarly used method of fundamental analysis of a company’s value. Technical analysis is based on collecting data on actual fluctuations in a stock’s price as a method of predicting future behavior. Fundamental analysis is based on economic factors that establish a company’s net worth, such as its capitalization level, price-to-earnings ratio, and so on. Ralph Nelson Elliott, a career accountant, is credited with formulating the Elliott Wave principle in the 1930s. He used his understanding of crowd psychology and social trends, now known as behavioral economics, to map the market cycles of structures in rising and falling stock prices.
Proponents of the Elliott Wave principle divide it into two types of market cycle waves, known as Impulse Wave and Corrective Wave. These are divided into finer wave structures, with five for the Impulse Wave and three for the Corrective Wave. The waves follow a fractal pattern regardless of the time period they are examined, which means that a stock’s annual trend chart will look a lot like the same stock’s hourly trend chart when using Elliott Wave calculations.
Market trends predicted by the rules of Elliott Wave principles are quite straightforward and logical. For example, for a rising stock, wave counting rules dictate that Wave Two must not break below Wave One and Wave Three must not be the shortest wave between Waves One, Three and Five. Nesting these rules within other rules makes the Elliott Wave principle quite reliable. Traders who rely on the method rely on a general principle that the trends indicated by three impulse waveforms and six corrective waveforms are conclusive evidence of a stock’s direction.
It took Ralph Elliott a long and detailed study of stock trends for 75 years until he felt confident enough to publicly release elements of his theory at age 66. He first published it in his book The Wave Principle in 1938 at the age of 67. The Elliott Wave principle is still widely accepted as legitimate today, and Elliott was considered something of a renaissance man in his day. The US government thought so highly of his accounting skills that he was appointed Nicaragua’s Chief Accountant by the US Department of State. His experiences in Central and South America have led to important results such as the financial development policies adopted by the World Bank.
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