Introduction to Elliott Wave Theory

This introduction to Elliott Waves is meant to open your mind to methods beyond pure Price Action. Even though the usual cycles on the crypto market are currently broken by the news flow, it’s sometimes worth getting to know new approaches to broaden your horizons and maybe even find fresh opportunities. Before anything else, I want to stress that this is only a quick theoretical overview; this guide is meant to be expanded soon. What’s more, while I regard Wyckoff as a mentor, the same can’t be said of Elliott. Finally, if chart patterns and trading setups interest you, I’ve also written a course on pattern trading that brings together the few chartist setups I actually use!

Ralph Nelson Elliott developed the Elliott Wave theory in the 1930s.

Elliott believed that the stock markets, which you might assume behave in a somewhat random and chaotic way, actually move according to repetitive patterns.

In this introduction to Elliott Waves, we’ll see how Ralph N. Elliott moved from theory to practice!

Elliott Wave theory is a form of technical analysis that looks for recurring price patterns linked to repetitive behavior in sentiment and in the psychology of traders and investors.

This theory identifies impulse waves that establish a pattern and corrective waves that push against the overall trend.

Each set of waves is nested within a larger set of waves that follow the same impulse-and-correction pattern. This amounts to a fractal approach.

Elliott Waves: the Theory

Elliott claims that the price of an asset depends primarily on the fluctuations of mass psychology. In theory, this shows up as recurring fractal patterns, or “waves,” on the financial markets.

Elliott’s theory bears some resemblance to Dow theory, since both recognize that stock prices move in waves. However, because Elliott also acknowledged the “fractal” nature of the markets, he was able to break them down and analyze them in far greater detail. Fractals are mathematical structures that repeat endlessly at ever-smaller scales. Elliott found that the price patterns of stock indices were structured in the same way. He then began to study how these repetitive patterns could be used as predictive indicators of future market moves.