The Elliott Wave Principle is a popular technical tool used by FOREX traders to forecast where prices might head in the future. Ralph Nelson Elliott discovered this wave pattern secret in the 1930s. Since patterns do not just come from anywhere, or from out of space, but result from all the interactions of traders, buying and selling, you see the same patterns over and over again. This indicates that human behaviour is repetitive. Elliott’s repetitive wave sequence reflects these human emotions in the marketplace.
These patterns are defined by five and three wave movements. Five waves are with the trend, and three waves are against the trend. The five waves that move within the direction of the main trend are called Impulsive waves. They are identified by numbers on the chart. The three waves are the Corrective waves that move against the trend. The three wave corrective sequence is recognized by letters. Once the five and three wave moves complete the cycle, the sequence continues as you can go down into smaller and smaller degrees of the trend.
Within the dominant trend, waves 1, 3, and 5 are “motive” waves, and each motive wave itself subdivides into five waves. Waves 2 and 4 are “corrective” waves, and subdivide into three waves. 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 trend, while corrective waves move in opposition to it.
Among market technicians, wave analysis is widely accepted as a component of their trade. To use it in everyday trading you will need to be able to identify series of wave patterns.