Elliott Wave Theory — Trading Wiki

What Elliott Wave Theory means

Markets move in predictable 5-wave impulse and 3-wave corrective patterns reflecting crowd psychology. Used to forecast future price movements at multiple degrees.

In depth

Elliott Wave Theory is a form of technical analysis developed by Ralph Nelson Elliott in the 1930s, proposing that financial markets move in repetitive cycles driven by collective investor psychology. The theory identifies two types of waves: impulse waves (which move in the direction of the main trend in 5 sub-waves labeled 1-2-3-4-5) and corrective waves (which move against the main trend in 3 sub-waves labeled A-B-C). These patterns occur at every degree of trend, from multi-decade supercycles down to minute-by-minute micro-waves, creating a fractal structure where smaller patterns nest within larger ones.

The rules governing Elliott Wave counts are strict: Wave 2 cannot retrace more than 100% of Wave 1. Wave 3 cannot be the shortest of waves 1, 3, and 5 (and is typically the longest and most powerful). Wave 4 cannot overlap the price territory of Wave 1 (in non-leveraged markets). Within the impulse sequence, waves 1, 3, and 5 are motive waves that move in the trend direction, while waves 2 and 4 are corrective waves. The corrective waves typically retrace specific Fibonacci percentages of the preceding impulse wave — 38.2%, 50%, or 61.8% — creating a direct link between Elliott Wave Theory and Fibonacci analysis.

The theory's appeal lies in its ability to provide a structural framework for understanding where the market is within a larger cycle. If a trader correctly identifies the wave count, they can anticipate which type of move is likely next — for example, identifying the end of a Wave 2 correction provides a high-probability entry point for the typically powerful Wave 3 advance.

Key points

• Markets move in 5-wave impulse + 3-wave corrective patterns
• Wave 3 is typically the longest and most powerful wave
• Fibonacci ratios determine common wave retracement levels

Practical tip

Don't try to predict exact wave counts — focus on identifying Wave 3 setups. When you see a clear 5-wave decline followed by a 3-wave bounce (potential Wave 1-2 completion), the next impulse wave is likely Wave 3 — the longest and most profitable wave to trade.

Why it matters when you are learning

Elliott Wave is complex but gives you a 'map' of market cycles. Even a basic understanding helps you recognize whether a trend is young or exhausted.

Practising Elliott Wave Theory on the simulator

Recognising Elliott Wave Theory on a static example is easy; spotting it on the right-hand edge of a live chart, before the outcome is known, is the actual skill. Open the practice desk, scan a handful of instruments you already follow until you find a candidate, and mark the level that would prove the read wrong. Take a small simulated position, then come back a day later and compare what happened with what this page describes. Educational simulation only — not financial advice.