Elliott Wave Theory (EWT)

Elliott Wave Theory (EWT) is a technical analysis approach that suggests that price movements in financial markets follow repetitive and predictable patterns. It was developed by Ralph Nelson Elliott in the 1930s.

According to the theory, price movements occur in a specific cycle consisting of five wave movements and three corrective movements. These wave movements represent the sub-trends within a larger trend.

In an uptrend, there are five wave movements. These consist of three “impulse” waves (1, 3, and 5) and two “corrective” waves (2 and 4). The impulse waves generally represent periods of price increase where investors are buying. The corrective waves, on the other hand, represent periods of price correction or consolidation where investors may take profits.

Similarly, a downtrend also consists of five wave movements. However, in this case, the downward waves (1, 3, and 5) are followed by upward corrective waves (2 and 4). The downward waves represent periods of price decrease where investors are selling, while the upward corrective waves represent periods of price correction within the downtrend.

Elliott Wave Theory also suggests that these wave movements have proportional relationships with each other. For example, the first wave movement may be similar in size to the fifth wave movement. Additionally, the second wave movement may be similar in size to the fourth wave movement. These ratios are used to enhance the predictability of price movements.

Elliott Wave Theory forms the basis for many technical analysis tools used to analyze price movements in financial markets. It helps traders and investors identify potential trends, reversals, and price targets. However, it is important to note that applying Elliott Wave Theory requires experience and practice to achieve accurate results.