Elliott Waves

Elliott Wave Theory is a method of analyzing market price movements based on the idea that prices don’t move randomly but follow predictable, repeating wave patterns driven by crowd psychology. Developed in the 1930s by Ralph Nelson Elliott, it proposes that markets move in a series of five waves in the direction of the main trend, followed by three corrective waves moving against it. These patterns nest inside each other at different scales, from minute-to-minute charts all the way up to decade-long market cycles.

The five-wave impulse pattern works like this: waves 1, 3, and 5 move in the direction of the trend (motive waves), while waves 2 and 4 are smaller pullbacks or corrections. After the five-wave cycle completes, the market makes a corrective move consisting of three smaller waves (labeled A, B, and C). Practitioners try to identify which wave the market is currently in and use that to predict what comes next. It’s highly subjective, though — two analysts looking at the same chart can often reach completely different wave counts, which is one of the main criticisms of the theory.

Example: Think of Elliott Waves like the tide coming in at a beach. The water doesn’t just rush straight in — it surges forward, pulls back a little, surges forward again, pulls back, and so on, in a rhythmic pattern. Each individual surge forward is a motive wave; each small retreat is a corrective wave. After enough surges, the tide reaches its peak and then the whole pattern reverses. Elliott Wave analysts try to predict exactly where the water is in that cycle.