What Is An Elliott Wave?

The Elliott Wave refers to a principle in which investors use to predict or time the market

. The person who came up with the Elliott Wave theory in 1938 is Ralph Nelson Elliott. The theory is based on the idea that the stock market consists of large groups of traders, and like a social group, they would behave similarly in certain patterns that would repeat themselves. Such patterns can actually be identified by looking at the stock market price charts over a period of time.

The name of the theory originates from the founder of the theory and his observations of the patterns in which appear like waves in the stock price charts. The observation is as such: a stock price would move forward, fall back, and then move forward again. On the other hand, if the trend is downwards, the stork price will move downwards, experience a small recovery, and then continue its decline downwards. Nevertheless, there are many forms of Elliott Wave patterns, as well as variations of them. Even within the Elliott Wave itself, you will be able to find more patterns within the pattern.

As the behavior of crowds is basically generalizations, the Elliott wave signals are not exactly a reliable predictor. Furthermore, there are other variables that will affect the stock price and market behavior, and cannot be predicted on when they would occur and how they would affect them.

When it comes to choosing an investment strategy, relying on the theory may not be suitable for short term prediction as it is meant to be a movement over a period of time. Despite so, those observing Elliott wave signals will do much better if they are able to understand the concept well and know when to use it, as well as associate other theories to the situation and analyze them properly.

by: Chris Cornell

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