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What is an Elliott Wave and What Does it Look Like

What is an Elliott Wave and What Does it Look Like

Elliott waves are the basic building block of the Wave Principle.

The Wave Principle is Ralph Nelson Elliott’s discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature. From this discovery, he developed a rational system of market analysis. Elliott isolated 13 patterns of movement, or “waves,” that recur in market price data and are repetitive in form but not necessarily repetitive in time or amplitude. He named, defined and illustrated the patterns. These patterns are Elliott waves.

These Elliott waves link together to form larger versions of those same patterns. They, in turn, link to form identical patterns of the next larger size, and so on. The result is the illustration you see below:

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In markets, progress ultimately takes the form of five Elliott waves of a specific structure. As you can see below in the most basic Elliott wave structure, waves (1), (3) and (5) actually affect the directional movement. Waves (2) and (4) are countertrend interruptions.

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The two interruptions are a requisite for overall directional movement to occur. And though there are several variations of Elliott waves, all of them fit into the basic structure you see above. The stock market is always somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.

Source: Elliott Wave International (http://www.elliottwave.com/a.asp?cn=CMT Association&url=http://www.elliottwave.com/introduction/elliott_wave.aspx)