What is an Elliot Wave?

What is an Elliot Wave?

The Elliot Wave is a principle or tool used by investors trying to predict or time the market. Elliot Wave theory was developed in the 1930s by Ralph Nelson Elliot. Elliot Wave theory is based on the premise that the stock market is made up of a large group of traders and that this group, as a collective, tends to behave as any large social group, with their behavior following certain patterns that tend to repeat themselves. These patterns can be discerned by looking at charts of the stock price over time.

Elliot Wave theory gets it name from the fact that these patterns resemble waves. The price of the stock surges forward, falls back, and then surges forward again. If the stock price is trending down, then the stock price will surge downward, then recover a bit before continuing its downward decline.

There are a large number of Elliot Wave patterns and an almost as large number of variations on these patterns. There are also Elliot Wave patterns within these Elliot Wave patterns. Crowd behaviour is far from an exact science, and as a result, Elliot Wave theory is far from an exact science as well.

Complicating things further, stock prices and market behaviour are also influenced heavily by outside events, many of which cannot be predicted. This external influence on the price movement of stocks can ruin the best Elliot Wave theory analysis.

For most investors, having an investment strategy that requires reliable prediction of short term price movement is a poor choice.

Elliot Wave theory and similar technical tools are best left to those few traders who have the extensive knowledge required to know when and how to implement such complex tools and theories. Even then, there are many who think that Elliot Wave theory is simply a system with little chance of success.

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