Elliott Wave is a type of technical analysis devised by a guy who recognized that financial markets move in recurrent patterns as a result of underlying population psychology based on greed and fear.
Back in the 1920s and 1930s, there was a mad genius and professional accountant named Ralph Nelson Elliott.
Elliott demonstrated that stock markets, which were assumed to behave in a rather chaotic fashion, actually did not by closely reviewing 75 years’ worth of stock data.
He finally had enough evidence (and confidence) to communicate his discoveries with the world when he was 66 years old.
His theory was described in the book The Wave Principle.
What is Elliot Wave?
According to him, the market traded in recurrent cycles, which he attributed to investor emotions produced by outside forces (ahem, CNBC, Bloomberg, WSB) or the prevalent psychology of the period.
Elliott observed that price swings induced by collective psychology always appeared in the same repeated patterns.
He referred to these up and down swings as “waves.”
He argues that by accurately identifying price recurring patterns, you may predict where the price will go (or not go) next.
This is why Elliott waves are so tempting to traders.
It enables them to pinpoint precise points at which the price is most likely to revert.
In other words, Elliott devised a system that allows traders to identify tops and bottoms.
So, in the midst of price chaos, Elliott discovered order. Isn’t that amazing?
Of course, like all insane geniuses, he sought to claim this insight, so he coined the phrase “The Elliott Wave Theory.”
But before we go into the Elliott waves, you should know what fractals are.
What exactly are fractals?
Fractals are structures that can be divided into parts, each of which is a nearly identical copy of the whole.
Mathematicians refer to this trait as “self-similarity.”
So, what is the significance of fractals?
Elliott waves are fractals, which is an essential characteristic. Elliott waves, like seashells and snowflakes, can be further subdivided into smaller Elliot waves.