The story of Elliott’s Wave Theory
Wave analysis was founded by world-renowned author and analyst Ralph Nelson Elliott, 1871-1948. He is also the author of a series of articles and a book that has become a best seller: “nature’s Law – the Secret of the Universe”, published in 1946.
Ralph Nelson Elliott
According to the point of view of Elliott, the graph of changes of prices of market instruments has a structure of waves. And the way prices fluctuate is just a graph showing changes in the psychological state of the multitudes (market participants). People are often driven by emotions, especially when it comes to operators. And quite strong emotions rebel in the branches of human activity, which are connected to finance, where there is a chance of both losing and earning money. Trading in securities and goods markets can also be included in those branches. Subsequently, since the late 1970s, the Forex market was also included.
Human emotions gradually change from optimism to pessimism, from euphoria and hope in the future due to uncertainty, disappointment, fear and fear in operating. Sometimes negative emotions such as greed and Justice control market participants, and that is why absolutely unexpected changes in trading instrument prices occur. These changes look like waves in the graphs of price fluctuations. Elliott argued that there is a limit amount of Wave models (patterns). He paid special attention to the sequence of Fibonacci numbers.
The fundamentals of Wave analysis
The main elements of the theory of waves of Elliott are the geometry and the arithmetic of the Fibonacci numbers. According to him, there is a specific clear logic in wave rotation, which gives an opportunity to predict future changes in the mood of the crowd and particularly predict price changes. The main role in the structure of the price movement plays five waves of motifs and three correctors.
Another characteristic of waves and wave models is their ability to form large price movements and create larger wave models using the set of simple waves similar to these; this fact demonstrates the fractional nature of waves. Elliott therefore almost predicted the foundation of modern science with respect to natural processes based on the fractional principle, in half a century. Using this science, it is possible to clearly identify and describe the components of the graphic models, waves that are repeated in market conditions.
Elliott and his followers gave names and illustrated the models, described the relationships between them. He called this phenomenon ” The Wave Principle.” Today The Wave Principle is not a science but it aims to reach that level. And it’s quite possible that Elliott’s Wave Theory will become a science developed in the near future.
However, there is the mistaken belief that the Principle of Elliott Wave can only be used for the analysis of market and price fluctuations of the instruments of exchange. This belief radically reduces the value and expectation of theory. For Elliott, human activity and market activity were only a couple of segments. In addition to that, there were some problems in the application of Elliott’s theory due to the large number of interchangeable terms that appeared, as Elliott’s books and those of his followers were translated by different people at different times. That is why there has been so much criticism of this theory.
Let us hope that all these problems will be solved and that Elliott’s theory will be further distributed among the operators.