Elliott Wave Principle
The Elliott wave principle states that stock markets behave according to patterns, not chaos. Ralph Nelson Elliott pointed out that the market unfolds according to a basic rhythm or pattern of five waves in the direction of the trend at one larger scale and three waves against that trend. These waves reflect the actions and emotions of humans to certain events. These reactions can happen in a massive way as a psychological move and cause the behavioral patterns or waves.
He was able to analyze the stock market according to those patterns and make predictions based on those trends.
There are two wave patterns:
- Impulse: They affect the market in a powerful way. They move in the same direction as the trend of the next larger size or degree.
- Corrective: They make small “corrections” to a preceding impulse wave. They move against the direction of the trend of the next larger size or degree.
The order of degrees goes as follows (approximate durations):
- Grand supercycle: multi-decade to multi-century
- Supercycle: a few years to a few decades
- Cycle: one year to a few years
- Primary: a few months to a couple of years
- Intermediate: weeks to months
- Minor: weeks
- Minute: days
- Minuette: hours
- Subminuette: minutes
In summary, the Elliott wave principle helps you identify what the markets can do and what they cannot do. It is a mathematical way to make predictions and, of course, profits.
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