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The History of Elliott Wave
The Elliott Wave Theory is named after Ralph Nelson Elliott. Ralph, an accountant who during a long period of convalescence from severe illness decided to examine the stock market averages in the wake of the disaster of 1929 to find some sort of method behind the madness of the market. Elliott uncovered what he believed to be a recurring pattern in financial averages and even social phenomena that allowed for the first time a certain degree of foresight into upcoming market moves.
Inspired by the Dow Theory and by observations found throughout nature, Elliott concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves. In fact, Elliott believed that all of man's activities, not just the stock market, were influenced by these identifiable series of waves.
Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified.
Now don't let others tell you that you shouldn't use Elliott Wave until you are not entirely convinced of that. If you use Elliott Wave, then it's not that you will be able to gain extraordinary returns, but i feel that you will always be in the right place at the right time most of the time when taking a trade.
What is Elliott Wave?
In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns. His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns or waves that recur in the markets. Very simply, in the direction of the trend, expect five waves. Any corrections against the trend are in three waves. Three wave corrections are lettered as "a, b, c." These patterns can be seen in long-term as well as in short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. This information (about smaller patterns fitting into bigger patterns), coupled with the Fibonacci relationships between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid reward/risk ratios.
There have been many theories about the origin and the meaning of the patterns that Elliott discovered, including human behavior and harmony in nature. These rules, though, as applied to technical analysis of the markets (stocks, commodities, futures, etc.), can be very useful regardless of their meaning and origin.