Introduction to Elliott Wave Theory

Ralph Nelson Elliott discovered that stock market prices move in recognizable, fractal wave patterns. The same structures appear on every timeframe.

The Core Principle

Markets alternate between two phases:

1. Motive (Impulse) Phase — 5 waves in the direction of the trend
2. Corrective Phase — 3 waves against the trend

Together, these 8 waves form one complete cycle.

The 5-Wave Impulse

• Wave 1 — Initial move. Smart money starts accumulating.
• Wave 2 — Pullback. Never retraces 100% of Wave 1.
• Wave 3 — The strongest wave. The crowd joins. Usually the longest.
• Wave 4 — Consolidation. Cannot overlap Wave 1 territory.
• Wave 5 — Final push. Retail FOMO. Momentum divergence is common.

The 3-Wave Correction (A-B-C)

• Wave A — First counter-trend move
• Wave B — Partial retracement (often a trap)
• Wave C — Final corrective leg, often equal in length to Wave A

Why It Matters

• Context — Know where in the cycle you are
• Bias — Trade with impulse waves, be cautious in corrections
• Targets — Fibonacci ratios project wave lengths
• Invalidation — Clear rules tell you when you're wrong

Key Takeaway

Elliott Wave gives you probable scenarios with objective invalidation. It's not prediction — it's structured analysis of crowd behavior.