Elliott Wave Theory, developed by Ralph Nelson Elliott in 1930s, is technical analysis theory proposing markets move in recognizable wave patterns. Complete wave cycle consists of 5 impulse waves (1-2-3-4-5) and 3 corrective waves (A-B-C), with each wave subdividing into smaller waves.
Impulse Wave: 5-3-5-3-5 structure Wave 1: Initial rise Wave 2: Pullback (cannot break below Wave 1 start) Wave 3: Main rally (typically longest and strongest) Wave 4: Pullback (cannot enter Wave 1 territory) Wave 5: Final rise Corrective Wave: 3-3-5 structure Wave A: Initial decline Wave B: Bounce Wave C: Final decline Fibonacci Relationships: Wave 2 typically retraces 50-61.8% of Wave 1 Wave 3 typically 1.618× Wave 1 Wave 4 typically retraces 38.2% of Wave 3
Impulse Wave: 5-wave rising structure
Corrective Wave: 3-wave pullback structure (zigzag, flat, triangle)
Extension: One impulse wave particularly long
Failure: Wave 5 fails to exceed Wave 3 high
Diagonal Triangle: Wedge structure
Wave 3 Confirmation: Breaks above Wave 1 high, strongest buy signal
Wave 4 Complete: Pullback ends, preparing for Wave 5 rise
Wave 5 Complete: Trend may end, preparing for correction
Wave C Complete: Correction ends, new trend may begin
Wave Failure: Signals trend reversal
Wave Extension: Trend particularly strong
Triangle Breakout: Correction ends, trend resumes
Elliott Wave Theory is one of most complex but comprehensive technical analysis methods. Wave theory helps traders understand market phase and predict future price targets. Wave 3 is typically strongest and longest wave, best trading opportunity. Wave theory closely integrates with Fibonacci ratios for predicting retracements and targets. Wave counting requires extensive experience; different analysts may have different wave counts. Many traders combine wave theory with other technical tools to improve accuracy.
Provides complete market analysis framework, can predict price targets, understands market psychology, applicable to all markets and timeframes, perfectly integrates with Fibonacci
Very steep learning curve, wave counting subjective, requires extensive experience, difficult to apply in real-time, different analysts may have different interpretations
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