Elliott Wave Principle
The Elliott Wave Principle is a theory of market behavior developed by Ralph Nelson Elliott in the 1930s. It states that financial markets move in repetitive patterns that reflect the collective psychology of participants. The core pattern is simple: markets advance in five waves and correct in three waves. This 5-3 pattern repeats at every timeframe, from monthly charts down to tick data. Waves 1, 3, and 5 move with the main trend and are called motive waves. Waves 2 and 4 move against it and are called corrective waves. After the five-wave advance completes, a three-wave correction (A-B-C) follows before the next five-wave sequence begins. The principle isn't just about pattern recognition. It's about understanding where you are in the market's cycle. If you know Wave 3 just started, you ride it aggressively. If Wave 5 is completing, you tighten stops and look for reversal signals. Elliott found that the Fibonacci sequence governs the relationships between waves in both price and time.
Ralph Nelson Elliott observed that the 1930s stock market crash and recovery didn't happen randomly. He identified a five-wave decline from 1929 to 1932 followed by a three-wave structure in the recovery. Modern practitioners apply the same 5-3 framework: counting five waves up on the S&P 500 weekly chart, then waiting for the A-B-C correction before entering the next impulse.