Introduction to Elliott Waves

 

Hello there, this is tradingpedia.com and this video introduces the Elliott Waves Theory to you. It is one of the most wonderful and powerful trading theories ever invented. It was introduced for the first time in the 1930s by a guy named Ralph Elliott, in the United States.

The Elliott Waves Theory

This guy was an accountant and had nothing to do with the stock market. At one point in time he fell ill, and he was forced to stay in house. He studied the stock market and noticed that some patterns came and went consistently. He put the patterns together and developed a theory known today as the Elliott Waves Theory.

Before anything, it is worth mentioning that the theory was developed on the stock market, but its principles were expanded to any market that moves, like this one here. This is the EURUSD and any market can be subject to Elliott Waves analysis.

This is a vast theory, one of the most complex ever created. It is impossible to be presented in only one video, and this is the reason why this video introduces the concept to you and what Elliott wanted to say and prove almost a century ago.

According to the Elliott Waves Theory, the market moves in cycles. Therefore, you will have a move to the upside, followed by a move to the downside. In other words, the action, and the reaction to that market move. Or a move to the downside is always followed a reaction. So you have a bearish trend, and a reaction.

This is called a cycle with the Elliott Waves Theory and Ralph Elliott identified many cycles – grand cycles, super cycles, minuets, and so on. Different cycles of different degrees and each cycle looks like this. It is formed out of an impulsive move, or a five-wave structure, labeled with numbers – 1,2,3,4,5. So this move to the upside is impulsive, labeled with numbers, and we can put it like this – 1-2-3-4-5.

Impulsive Wave

An impulsive wave has many rules and we won’t discuss them here. But it is important to note that an impulsive wave is labeled with numbers and any impulsive wave has five waves of its own.

Out of those five waves, the first, the third and the fifth one is impulsive as well, but of a lower degree. In other words, this 3rd wave should be an impulsive wave but of a lower degree. Let’s illustrate it with a different color – 1,2,3,4,5. This is how you understand the different cycles that Elliott refers to.

This 3rd wave here in red is also made out of five-wave structures, and so on. Out of these five waves, the 2nd and the 4th waves are called corrective waves. They are labeled with letters, instead of numbers, and are also called threes as most of them have a three-wave structure or an a-b-c.
A triangle is also a corrective wave, labeled with letters – a-b-c-d-e, but it is also called a three only to illustrate the corrective character of those segments.

What follows after a five-wave structure is an a-b-c of the same degree. That would be a, that would be b, that would be c. This is called a cycle with the Elliott Waves Theory and this cycle contains an impulsive and a corrective wave. This is the corrective wave, and this is the impulsive wave.

The theory goes beyond such simplicity in the sense that corrective waves are simple or complex. Simple ones are flats, zigzags, triangles. Complex corrections are double or triple combinations, double or triple flats, running corrections, horizontal corrections, and so on.

Impulsive waves are of multiple types as well. You have third wave extensions where the third wave is the longest, fifth wave extensions, double extended impulsive waves, or terminal impulsive waves. All these types of patterns have different rules and add to the complexity of the Elliott Waves Theory.

Important Things

What is important to know at this point with this introductory video is that, more or less, this is a cycle with the Elliott Waves Theory, and such a structure may be, for instance, the first wave in an impulsive wave of a bigger degree. Imagine here a first wave, let’s make it a bit bigger and of a different degree; this may be the second wave.

Then, what the trader does is forecasting the third wave’s length. Of, this cycle here may be the a-wave of a zigzag pattern and this may be the b-wave of a zigzag pattern and then what the trader does is to forecast the c-wave of that zigzag.

The beauty of the theory is that it allows you to forecast a future market move while keeping a tight money management control. You will always know where the market goes if you do your homework correctly. However, it has some drawdowns.

One of the major drawdowns is that counting waves with the Elliott Waves Theory is time consuming, it requires a top/down analysis from the yearly and monthly charts to the daily and four-hour charts, constantly updating the price action and that takes time.

Sum up

To sum up this introductory video, remember that a cycle with the Elliott Waves Theory is formed out of an impulsive wave, five-wave structure, and a corrective wave, a three-wave structure. Multiple cycles of various degree exist.

Thank you for being here. Bye bye.