Introduction
Elliott Wave Theory, developed by Ralph Nelson Elliott in the 1930s, is a form of technical analysis that traders use to analyze financial market cycles. It is based on the idea that markets move in repetitive wave patterns influenced by investor psychology. These waves reflect the natural rhythm of crowd behavior and can be used to forecast future price movements.
At its core, Elliott Wave Theory identifies two main types of waves:
-
Impulse Waves (Motive Waves) – Move in the direction of the main trend and consist of five sub-waves (1, 2, 3, 4, 5).
-
Corrective Waves – Move against the trend and consist of three sub-waves (A, B, C).
Price: $11
Format: Book | 18 pages
Or, get this book for free when you subscribe to our exclusive trading education program. Learn more.
Every Wave and Its Characteristics
Impulse Waves (Motive Waves) – 5-Wave Structure
1️⃣ Wave 1 – The market makes the first move in the trend. It is usually not very strong since traders are still uncertain.
2️⃣ Wave 2 – A correction follows, retracing some of Wave 1’s gains, but it never goes below its starting point.
3️⃣ Wave 3 – The strongest and longest wave, driven by increasing momentum and broad participation. This is where big trends happen.
4️⃣ Wave 4 – A corrective pullback, but it is usually weaker than Wave 2. Often takes the form of a sideways movement.
5️⃣ Wave 5 – The final move in the trend, often driven by emotional trading (euphoria or panic). Sometimes, it shows signs of weakness (divergence in indicators).
Corrective Waves – 3-Wave Structure (A-B-C)
🅰️ Wave A – The first move against the previous trend, often mistaken as a pullback.
🅱️ Wave B – A temporary recovery that tricks traders into thinking the trend is continuing.
🅲️ Wave C – The final move in the correction, usually stronger than Wave A, signaling the end of the correction.
Understanding these waves helps traders predict market trends, identify entry and exit points, and avoid false moves.
