Elliot Theory

Ralf Nelson Elliott studied market behavior within the 75-years time interval. Examining yearly, monthly, daily, hourly, and half-hourly charts he tried to find recognizable patterns and reveal reasons of Dow Jones indexes behavior, to derive in such a way consistence and principles of prices behavior. In the process of his investigations and various corrections he started to notice certain exact correlations. Then Elliott decided to introduce into his theory the member of investment council in Detroit Charles Jr. Collins who couldn’t stay indifferent to the obvious correlations of outlooks and published Elliott’s work in the magazine Financial World. Later on August 31 in 1938 was published the book “The Wave Principle”. The book had a great success.

At present Elliott’s wave theory is regarded as the fractal one. He noticed that many fragments or, to be more exact, patterns of prices on chart are often similar by form but different by time of origin or amplitude like lots of objects in the nature. This principle of pattern construction was called Wave Principle by Elliott. At the studied chart Elliott distinguished 13 similar models which he described, named and even illustrated how from these models appear similar but bigger analogues forming more bigger analogues, leading to structural progression.

In his theory Elliott marked 5 waves of a certain structure, 3 of which cause directional movement crossing the two others – oppositely directed waves. Elliott also distinguished 3 permanent features of 5-wave pattern (fractal patterns). Wave 2 never crosses starting point of wave 1, wave 3 can never be the shortest of waves, and wave 4 never reaches price territory of wave 1. These 5-wave patterns are certainly encountered on price chart and it happens rather often. This can be explained by the fact that each decision on market is produced by important information and at the same time produces important information causing the following decisions.

Development of waves according to The Elliott theory is realized in two directions: moving and corrective. In moving direction only 5 waves take part and in corrective take part only 3 waves. Elliott himself never stated that there is only 5-wave pattern (form and fractal) and he didn’t think why the most important pattern of the market is 5 waves with progress and 3 with regress. The answer may be that it is the nature that chooses the most effective way – this is a conclusion of every analyst who is aware of the theory.