The Wave Theory Elliott was discovered in late 20 's by Ralph Nelson Elliott. He discovered that the stock market does not behave chaotically but in repetitive cycles, reflecting the actions and emotions of humans and due largely to mass psychology that he sees as the main culprit.
It was partly based on the Dow theory, which also uses the waves for the study of the stock market, but Elliott discovered the stock market fractral nature (repeating the same patterns in major and minor scale), analyzing it in more detail, and after years of study, identifying appropriate patterns to make predictions.
From the 70 's it gained popularity thanks to the rises and crashes predictions made by Frost and Prechter (“Elliott Wave Principle…key to stock market profits, 1978”).
The basic pattern: Three sawtooth with the 3rd shortest, for main trends (Wave 1,2,3,4,5)as the type of the following drawings:
Two sawtooth for corrections (wave A,(B),C), type:
Corrections will be obviously always lower in height than the trends (either upward or downward)
Let's look at an example of upward trends and downward corrections (but they can also be downward trends and upward corrections):
Then let's see more basic trends, which are small variations from the above ones:
And more basic corrections:
In addition, according to some authors, theElliott theoryhas three main rules that must be met in order to guide us in the evolution of the stock markets and can be very useful to recognize patterns:
1) The second wave may not fall below the first,
2) The third wave can not be the lowest of the expansion waves, and
3) The fourth wave should not overlap with the first one.
In addition, setbacks in the waves tend to be in different setbacks of Fibonacci, mainly in flashbacks of 38,2% and 61,8%.
Important tool to project objectives to achieve in the next wave, It's to plot angle or parallel lines that trace the channel of the trend or correction. Let's look at some examples: