The Fluidity of Elliot Wave

The Fluidity of Elliot Wave. The Elliott wave principle is a form of technical analysis that finance traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors.

Ralph Nelson Elliott. a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call “Elliott waves”, or simply “waves”.

Elliott published his theory of market behavior in the book “The Wave Principle” in 1938. summarized it in a series of articles in “Financial World” magazine in 1939. and covered it most comprehensively in his final major work, “Nature’s Laws: The Secret of the Universe” in 1946. Elliott stated that “because man is subject to rhythmical procedure. calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable.”

The empirical validity of the Elliott Wave Principle remains the subject of debate. Foundation The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale. In Elliott’s model, market prices alternate between an impulsive, or motive phase. and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1. 3. and 5 are impulses. and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse. a retrace, and another impulse. In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the tend, while corrective waves move against it.


The patterns link to form five and three-wave structures which themselves underlie self-similar wave structures of increasing size or higher degree. Note the lowermost of the three idealized cycles. In the first small five-wave sequence, waves 1, 3 and 5 are motive, while waves 2 and 4 are corrective. This signals that the movement of the wave one degree higher is upward. It also signals the start of the first small three-wave corrective sequence. After the initial five waves up and three waves down, the sequence begins again and the self-similar fractal geometry begins to unfold according to the five and three-wave structure which it underlies one degree higher. The completed motive pattern includes 89 waves, followed by a completed corrective pattern of 55 waves. Each degree of a pattern in a financial market has a name. Practitioners use symbols for each wave to indicate both function and degree—numbers for motive waves, letters for corrective waves . Degrees are relative: they are defined by form, not by absolute size or duration. Waves of the same degree may be of very different size and/or duration. Understanding those personalities is key to the application of the Wave Principle: they are defined below. Pattern recognition and fractals Elliott’s market model relies heavily on looking at price charts. Practitioners study developing trends to distinguish the waves and wave structures, and discern what prices may do next: this the application of the Wave Principle is a form of pattern recognition. The structures Elliott described also meet the common definition of a fractal . Elliott wave practitioners say that just as naturally occurring fractals often expand and grow more complex over time, the model shows that collective human psychology develops in natural patterns, via buying and selling decisions reflected in market prices: “It’s as though we are somehow programmed by mathematics. Seashell, galaxy, snowflake or human: we’re all bound by the same order.” Critics say it is a form of pareidolia.