Elliott Wave Theory
Understanding market psychology through wave patterns and Fibonacci relationships.
What is Elliott Wave Theory?
Developed by Ralph Nelson Elliott in the 1930s, this theory states that market prices move in predictable wave patterns driven by investor psychology. The basic pattern consists of 5 impulse waves followed by 3 corrective waves.
>Basic Structure
5 Impulse + 3 Corrective Waves
The Basic Wave Pattern
Impulse Waves (1-5)
Initial move, often mistaken for a bear rally
Corrective wave, retraces 50-61.8% of Wave 1
Strongest wave, never the shortest
Corrective wave, cannot overlap Wave 1
Final impulse, often shows divergence
Corrective Waves (A-B-C)
First leg of correction
Counter-trend rally/decline
Final leg, usually equals Wave A
The Three Cardinal Rules
Wave 2 Rule
Wave 2 cannot retrace more than 100% of Wave 1
Wave 3 Rule
Wave 3 cannot be the shortest impulse wave
Wave 4 Rule
Wave 4 cannot overlap the price territory of Wave 1
Fibonacci Wave Relationships
Wave 2
50%, 61.8%, 78.6%
of Wave 1
Wave 3
161.8%, 200%, 261.8%
of Wave 1
Wave 4
38.2%, 50%
of Wave 3
Wave 5
61.8%, 100%
of Wave 1
Trading Tips
- • Wave 3 is usually the best trading opportunity
- • Use Fibonacci to find entry points in Wave 2 and 4
- • Combine with other indicators for confirmation
Common Mistakes
- • Forcing wave counts to fit a bias
- • Ignoring the cardinal rules
- • Over-analyzing lower timeframes
>Elliott Wave Wisdom
"The Wave Principle is the study of crowd psychology, which follows natural law."