Elliott Wave Principle

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We all know the importance of Technical Analysis and how it works in today’s market. Technical tools like channels, Fibonacci retracements and oscillators like RSI, MACD etc do give us signals for when to buy and sell. Combining simple technicals along with advance technicals like Elliott wave and Gann Analysis always keep us one step ahead of the market movement.

Advance technical eradicate subjectivity and helps to take proper trading decisions. Today we shall see some important concepts of Elliott Wave theory.

In 1920 R.N. Elliott invented this theory and named Elliott Wave. He observed that there are thirteen patterns or waves that recur in market price data and are repetitive in form, but are not necessarily repetitive in amplitude or time.

We will now discuss some important concepts of Elliott wave theory
R. N Elliott has discovered 2 types of waves in the market
1. Motive or Impulse wave
2. Corrective Wave

1. Motive or Impulse waves

Elliott said that an impulse wave should have 5 waves in which 3 waves should decide the main direction of the trend while other 2 should be countertrend or corrective wave. By this he wanted to say that 3 waves will progress or regress but will tell you the main trend and the 3 waves are (1,3 &5). The other 2 which are corrective in nature will interrupt the main trend (2 &4).

There are some important rules to identify impulse waves
1.    Wave 2 which is a counter trend should not retrace the beginning of wave 1
2.    Wave 3 of all the motive waves should not be the shortest
3.    Wave 4 which is again a corrective wave should not overlap or enter in the territory of wave 1.

The above rules only apply for motive waves and not corrective.

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