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The Elliott Wave Principle

This tool which makes use of the repetitive patterns that are discovered on the flow of human psychology commonly called as Elliott Waves was formulated by late accountant Ralph Nelson Elliott. This is based on Elliott?s belief that all human activities are all rhythmical in nature and this rhythm has a high possibility of being predicted.

The main idea behind the Elliott Wave Principle is the physical law that in every action there is a complete or opposite One of the many forms of technical analysis that are used in predicting the occurrence of trends in any financial market is the Elliott Wave Principle. reaction.? This law is also said to be applicable in finance with the price increase or decrease considered to be main trend or action and the reactions that go against the price are corrections against the trend. These two are also called Impulsive and corrective ways respectively.

Impulsive waves usually move five times with three following the trend while the rest go against the trend. On the other hand corrective waves normally only has three movements with two going in the direction of the main correction and one going against. However, these numbers can also increase. In both kinds it is good to remember that large waves are made up of smaller waves and so on and so forth. This has the tendency to produce many waves which diminish significantly as the wave becomes smaller.

Classic Elliott waves come in many patterns like:

• Impulse pattern
• Extension pattern
• Diagonal Triangle Type 1
• Diagonal Triangle Type 2
• Failure or Truncated 5th

Correction waves, on the other hand include the following:

• Zigzag pattern
• Double Zigzag pattern
• Flat Pattern
• Expanded Flat or Irregular Flat
• Triangles which can also come as either ascending, descending or running
• WXY or Combination
• Running Flat

In determining which waves are grouped with each other, a process called channeling is used. They are usually shown as parallel lines containing the price movement of a particular wave. Aside from that it is also used to predict any targets for the appearance of the next wave. Also it is used to recognize the presence of waves of the same degree especially in the case of Zigzags and Triangles. If these waves are not equal, another count is usually recommended.

The use of the Fibonacci sequence also helps a lot in breaking down wave patterns. This famous sequence is best described by the fact that the any number included in this series is produced as the sum of the two numbers that precedes it.? This is very important because it gives you a chance to be more in control of your wave analysis. This is because it gives better accuracy in your count depending on the quality of your Fibonacci ratios. Aside from that it helps in projecting more realistic targets after the wave definitions are counted correctly and different scenarios are already distinguished.

This method is quite effective even though it has been criticized as being unreliable. However, many traders and investors still attest to its effectiveness and usefulness.