Elliot Wave Principle

The Elliot Wave Principle is named after Ralph Nelson Elliott who developed the concept in the 1930s. The idea behind the principle is that markets move in a certain pattern. According to Elliott every market price fluctuates between five waves and three waves. I will try to explain this with an image provided below.

The top line represents the longer time frame pattern. If we take a look at the coloured part of the graph, we can see a rising trend, with three big moves upward, and two downward moves. Waves 1, 3 and 5 are the so-called motive waves, waves 2 and 4 are called corrective waves. The corrective waves are the result of the market psychology, while the motive waves represent the longer trend as a result of the fundamentals.

If we take a closer look at the first wave (the green bar) and we zoom in on a smaller time frame (the middle graph) we can see that this first wave consist of 5 Elliot Waves inside it. If we zoom in on the second wave of the upper graph (the red bar) we can see that this corrective wave in itself consists of three waves inside it.
The same applies if we zoom in another level (the lower graph). Every motive wave of the middle graph consists of five waves in the bottom graph, and every corrective wave in the middle graph consists of three waves in the bottom graph.

If the Elliot Wave Principle is true in real forex market data, then it’s clear that this theory will enable you to make money. The end of wave 2 and 4 will give a signal to buy, while the end of wave 5 will give the trader a signal to sell.