Ralph Nelson Elliott developed one of the most renowned principles also known as the Elliott Wave theory. It has grown into a crucial element of technical analysis. The main idea was to describe the price movement through Wave patterns. In this article, you will learn major Elliott Wave principles.
We will describe the way it works and how traders can benefit from using it in the financial market.
Elliott Wave Theory Explained
When Ralph Nelson Elliott created his theory, he wanted to not only overview but also identify fractal wave patterns. The same can be done in reference to stock or commodity price movement. Besides, experts use the Elliott Wave pattern to observe consumers' behavior and make accurate predictions about the market being overbought or oversold.
If a trader spots the trend that may bring a potential profit, we call it a "riding wave". There are different types of waves in accordance with a specific event or action that takes place in the market. For instance, we can imagine home and real estate owners in an effort to replace the mortgages they have with better ones. This is what experts call a "refinancing wave". It becomes clear that Elliott Wave patterns may turn out to be the dominating force than trying to foresee the price movement and market action.
Despite the type of wave, here is what you need to consider about the principle:
- Elliott Wave theory is only a method that can be used along with other technical analysis tools to observe long-term price movements that result in investors' psychology or sentiments.
- The principle is based upon two major wave types. They include corrective (to set up a pattern) and impulse (to oppose larger trends) waves.
- A larger set of other waves can adhere to the two baseline types mentioned earlier.