how elliott waves work
some technical analysts profit from wave patterns in the stock market using the elliott wave theory the theory assumes that stock price movements can be predicted because they move in repeating up and down patterns called waves created by investor psychology or sentiment the theory is subjective and identifies two different types of waves motive or impulse waves and corrective waves wave analysis does not equate to a template to follow instructions wave analysis offers insights into trend dynamics and helps investors understand price movements impulse and corrective waves are nested in a self similar fractal to create larger patterns for example a one year chart may be in the midst of a corrective wave but a 30 day chart may show a developing impulse wave a trader with this elliott wave interpretation may have a long term bearish outlook with a short term bullish outlook impulse wavesimpulse waves consist of five sub waves that make net movement in the same direction as the trend of the next largest degree this pattern is the most common motive wave and the easiest to spot in a market it consists of five sub waves three of which are motive waves two are corrective waves image by julie bang investopedia 2020if one rule is violated the structure is not an impulse wave the trader would need to re label the suspected impulse wave corrective wavescorrective waves called diagonal waves consist of three or a combination of three sub waves that make net movement in the direction opposite to the trend of the next largest degree its goal is to move the market in the direction of the trend elliot wave theory vs other indicatorselliott recognized that the fibonacci sequence denotes the number of waves in impulses and corrections wave relationships in price and time also commonly exhibit fibonacci ratios such as 38 and 62 for example a corrective wave may have a retrace of 38 of the preceding impulse 1other analysts have developed indicators inspired by the elliott wave principle including the elliott wave oscillator chart the oscillator provides a computerized method of predicting future price direction based on the difference between a five period and a 34 period moving average elliott wave international s artificial intelligence system ewaves applies all elliott wave rules and guidelines to data to generate automated elliott wave analysis 3