Elliott Wave Theory is a powerful tool for predicting market movements by analyzing repetitive price patterns driven by investor psychology. The theory divides market trends into five impulsive waves (1-5) and three corrective waves (A-B-C). Let’s break it down:
Impulse Waves (1-5)
Wave 1: The start of the trend, usually fueled by early investors.
Wave 2: A corrective pullback as traders take profit.
Wave 3: The strongest wave, fueled by momentum and broad market participation.
Wave 4: Another pullback, but shallower than Wave 2.
Wave 5: The final move up, often driven by FOMO before a correction begins.
Corrective Waves (A-B-C)
Wave A: The first decline as early traders exit positions.
Wave B: A short-lived recovery as some traders think the trend will continue.
Wave C: The final bearish wave, often deeper than Wave A, marking the end of the correction.
Three Key Principles of Elliott Wave Theory
️ Wave 3 is never the shortest impulse wave.
️ Wave 2 never retraces past the start of Wave 1.
️ Wave 4 never overlaps with Wave 1.
How to Use It?
Traders use Elliott Waves to identify entry and exit points, confirming trends with indicators like Fibonacci retracements and RSI.