Elliott Wave Home What is the Wave Principle? The Wave Principle is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns. One of the easiest places to see this phenomenon at work is in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify repeating patterns in prices, and figure out where in those repeating patterns we are today, then you can predict where we are going in the future. The Elliott Wave Principle is named for its discoverer, Ralph Nelson Elliott. Mr. Elliott completed the bulk of his work on the Principle in the 1930s and 1940s.          What does it measure? Elliott wave analysis measures investor psychology, which is the real engine behind markets. When people are optimistic about the future of a given issue, they bid the price up. Two observations will help you grasp this: First, for hundreds of years, investors have noticed that events external to the market seem to have no consistent effect on the market’s progress. The same news that today seems to drive the market up is just as likely to drive it down tomorrow. The only reasonable conclusion is that the markets simply do not react consistently to outside events. Second, when you study historical charts, you see that the markets continuously unfold in waves. How does the Wave Principle fit in with technical analysis? Bob Prechter, EWI founder and President, has called the Wave Principle “the purest form of technical analysis”. He explains, “The Wave Principle is a catalog of the ways that the crowd goes from the extreme point of pessimism at the bottom to the extreme point of optimism at the top. It is a description of the steps human beings go through when they are part of the investment crowd, to change their psychological orientation from bullish to bearish. Since people don’t change much, the path they follow in moving from extreme pessimism to extreme optimism and back again tends to be the same over and over, regardless of news and extraneous events.” (from Prechter’s Perspective, p. 44)      What does a wave look like? In markets, progress ultimately takes the form of five waves of a specific structure. Waves (1), (3) and (5) actually affect the directional movement. Waves (2) and (4) are countertrend interruptions. The two interruptions are apparently a requisite for overall directional movement to occur. The stock market is always somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it. For what time frames does the Wave Principle work? The Wave Principle may be applied in all time frames. Waves come in degrees, the smaller being the building blocks for the larger. Waves link together to form larger versions of themselves, and they also link together to form the same patterns at the next larger size, and so on. The figure above shows how waves may be subdivided to establish different degrees of trend. Some of the largest wave patterns span hundreds of years, while some of the smallest span a few hours. Therefore, the Elliott Wave Principle is useful for forecasting market movements in all time frames. How can I apply the Wave Principle? The practical goal of any analytical method is to identify market lows suitable for buying (or covering shorts), and market highs suitable for selling (or selling short). The Elliott Wave Principle is especially well suited to these functions. Nevertheless, the Wave Principle does not provide certainty about any one market outcome; rather, it provides an objective means of assessing the relative probabilities of possible future paths for the market. Disclaimer - I am not a commodity trading advisor. The information on this site is for trading education only. There are no trading recommendations for any one individual made on this site and this information is paper trades for trading education. All trades are extemely risky and only risk capital should be used when trading. U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.