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R.N. Elliott Discovered the Wave Principle Over 70 Years Ago
This is your opportunity to learn the method that has stood the test of time

By Editorial Staff
Fri, 02 Mar 2012 11:45:00 ET
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In the 1930s, Ralph N. Elliott discovered  that stock market prices tend to move in recurring patterns. He defined these patterns (or "waves") and explained how they combine to create larger versions of themselves. He called his discovery the Wave Principle.

After much research into R.N. Elliott's work, A.J. Frost and Robert Prechter published the 1978 text Elliott Wave Principle. This lesson captures a flavor of Elliott's fascinating approach to market analysis.

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: “motive waves,” and “corrective waves.” Motive waves are composed of five sub-waves and move in the same direction as the trend of the next larger size. A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size. As the picture below shows, these two patterns form similar structures of larger sizes, or “degrees,” as R.N. Elliott, the discoverer of the Wave Principle, called them.

 

wave pattern

 

 

The above pattern begins with waves 1, 2, 3, 4 and 5 that together form wave (1) -- a five-wave, motive structure that tells us that the trend at the next larger degree is also upward. If you were reading this in real-time, and the rest of the pattern was not visible, it would also warn you to watch for a three-wave correction.

Corrective wave (2) in the chart above is followed by waves (3), (4), and (5), to complete an impulsive sequence one degree larger – labeled 1 (circled). This is followed by a three-wave correction of the same degree: wave 2 (circled) with subwaves (A)-(B)-(C). One way to think about corrective waves is that, because they move against the next larger trend, they lack the strength to unfold into a full five-wave move.

 


 

 

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The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.