Five waves forward, three waves back:Elliott saw a repeating track.
A technical analysis approach that identifies recurring wave patterns in price movements.
The theory proposes that markets move in five-wave impulse patterns followed by three-wave corrective patterns.
In plain words
Elliott wave theory is a way of reading charts put forward by Ralph Nelson Elliott in the 1930s. It holds that prices move in a repeating rhythm: five waves in the direction of the main trend, called an impulse, followed by three waves against it, called a correction. Each wave is said to be built from smaller waves of the same form.
See it move
Reached: 5
Why it matters
Analysts who use it try to place the current price within a count of waves, to describe where a trend might be in its course. Counts are subjective: two analysts can label the same chart differently, and a count is often revised after the price moves.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
On an invented chart a rise unfolds as five moves: from 100 to 110, back to 105, up to 125, back to 120 and up to 130.
- 1Waves 1, 3 and 5 rise+10, +20 and +10
- 2Waves 2 and 4 fall−5 and −5
- 3Net = 10 − 5 + 20 − 5 + 10 = 30, from 100 to 130
Three rising waves and two smaller falling ones make up the five-wave impulse that the theory describes.
A common mistake
A wave count can look like a forecast. It is an interpretation, usually clear only in hindsight, and there is no agreed test that shows a count to be right at the time.
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Educational information, not investment advice or a recommendation to trade.