Generally, impulsive waves move in the direction of the main trend, whereas corrective waves move opposite to the trend. Ralph detailed that in trending markets, the impulsive phase will consist of 5 waves whereas the corrective phase will consist of 3 waves, with all the waves alternating between impulse and correction. The Elliott Wave theory explains how market sentiment shifts between optimism and pessimism, simultaneously manifesting in the supply and demand of an underlying asset’s price.īroadly, Elliott Waves are made up of impulsive and corrective phases. Ralph opined that it is possible to discern extreme behaviours of market participants and thus, predict the start, continuation or end of different market cycles with investable accuracy. Developed in the 1930s by Ralph Nelson Elliott (and named after him), Elliott Waves are essentially a law of nature that describe how the collective psychology and sentiment of market participants drive the demand and supply of underlying assets. The Elliott Wave Theory is considered one of the ‘holy grails’ in the financial markets.
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