Elliot Wave Theory is a technical analysis approach to market analysis that attempts to identify patterns and forecast future price movements in financial markets. Ralph Nelson Elliot developed the theory in the 1930s, believing that financial market price movements were not random, but rather followed repetitive patterns.
Market trends move in waves, according to the Elliot Wave Theory, with each wave made up of a series of smaller waves. The theory distinguishes between two kinds of waves: impulse waves and corrective waves. Impulse waves are larger waves that move in the primary trend's direction, whereas corrective waves are smaller waves that move in the opposite direction of the primary trend.
To identify waves and their patterns, the Elliot Wave Theory employs a set of rules and guidelines. Traders who use the theory look for specific wave patterns and ratios in financial market price movements to forecast future price movements.
The use of Fibonacci ratios to identify wave patterns is a key feature of Elliot Wave Theory. Fibonacci ratios are mathematical ratios that can be found in nature as well as financial markets. These ratios are used to calculate potential target levels for price movements in a given wave.