What is the Elliott Wave Principle?

Elliott Wave Principle Definition. The Elliott Wave Principle is a form of technical analysis that investors use to forecast trends in the financial markets by using pattern recognition. The wave principle posits that collective investor psychology moves markets in a natural sequence, from optimism to pessimism and back again. These fluctuations create patterns, as evidenced by price behavior trends of a market. Each degree of change is significant and may occur over durations that range from minutes to decades. Ralph Nelson Elliott, a professional accountant, developed the concept in the 1930s. He proposed that market prices unfold in what practitioners today call Elliott waves, or simply waves. Elliott Wave analysts (or “Elliotticians”) contend that each individual wave has its own “signature” or characteristic, which typically reflects current investor psychology. Understanding those personalities is key to the application of the Wave Principle. Theory devotees study price charts and developing trends to distinguish waves and wave structures and predict future price movements in the market. Numbers from the Fibonacci sequence appear repeatedly in Elliott wave structures. Critics claim the process is far too subjective and that the market has already discounted wave patterns in the current price, thus suggesting that the future predictive value of the theory is specious.

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