What is Elliott Wave Theory?
Elliott Wave Theory
Forex Trading Glossary
Quick Answer: Elliott Wave Theory views price action as repeating waves driven by crowd psychology, combining impulsive and corrective moves.
What is Elliott Wave Theory?
Elliott Wave Theory proposes that markets move in repetitive wave patterns driven by crowd psychology. A full cycle consists of five impulsive waves followed by three corrective waves.
Wave Structure
- Impulse waves: Waves 1, 3, and 5 move with the trend.
- Corrective waves: Waves 2 and 4 retrace portions of the prior move.
- A-B-C correction: A three-wave move against the trend.
- Fractals: Each wave subdivides into smaller waves.
Practical Use
Combine Elliott Wave counts with support and resistance to avoid forcing a wave structure that does not fit reality.
Trader Tips
- Keep counts simple: Focus on clear impulsive and corrective patterns.
- Use guidelines: Wave 3 cannot be the shortest impulse, and Wave 4 should not overlap Wave 1.
- Integrate indicators: Momentum tools help validate wave strength.
- Plan contingencies: Maintain alternate wave counts in case the preferred scenario fails.
Related Terms
Learn More About Forex Trading
Now that you understand elliott wave theory, explore our comprehensive guides: