The Elliot Wave Theory is named after an accountant named Ralph Nelson Elliot and it is based partly on the Dow Theory. The Dow Theory is based on technical analysis and it defines price movement in terms of waves. Elliot was able to take this theory a step further through analyzing the markets in even greater depth. He concluded that the movements of the stock market could be predicted through observation and identification of repetitive patterns of waves. Elliot concluded as well that these waves are based on cyclic laws in human behavior or in other words the psychology of the masses.

The Elliot Wave Theory tells us that the market can exist in two phases. These phases are of course the bull market and the bear market. Additionally, the price movements on the market are divided into two sets of waves. There are five waves that occur in the direction of the main trend, and there are three corrective waves. Corrective waves move against the trend while impulse waves create the directional trend that causes the markets to actively move. Both the impulse and the corrective waves can be seen in long-term and short-term charts. The main criticism of this theory has to deal with the waves because it is hard to tell when a wave actually begins and when it ends. There are no clear definitions of this and therefore corrections can be difficult. Both types of waves are proportional however, and the stronger the impulse is, the stronger the correction. Conversely, the weaker the impulse, the weaker the correction is.

The Elliot Wave Theory is used with Fibonacci numbers as well. These numbers provide a mathematical foundation for the wave theory. In fact, these numbers actually construct the complete market cycle that is described with Elliot’s waves. Each cycle is comprised of a total wave count that falls within this Fibonacci number sequence.

In addition to the Elliot Wave Theory, please also read about another trading strategy used by some of the world’s most successful traders called Japanese Candlesticks . It is the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical analysis indicators, such as the moving average , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds .

Please continue your technical analysis education and read about Volume Analysis .