Trading is an excellent activity that offers you a lot of freedom in your life. That is the main reason why it has become so popular. Usually, traders apply technical analysis to their trading to understand how to trade better. For this reason, many traders are interested in technical analysis and tools available for its improvement.
If you trade in the stock market, most probably you came across the Elliott Wave Theory. However, ff you don’t have much idea about it then this blog is for you. In this blog, we will shed light on what precisely the Elliott Theory is.
Therefore, without further ado, let us get started.
What is Elliott Wave Theory?
The Elliott Wave Theory is a principle used to evaluate precise and quantifiable patterns that recurrently occur in the stock market. These price movement patterns are also known as waves. A series of waves creates a cycle that rises and falls continually as stock prices peak and fall.
This theory was established by a stock market analyst Ralph Nelson Elliott in 1930s. This principle made of different waves incorporating impulse waves and corrective waves. This theory contains specific rules regarding how to identify, predict, and capitalize on these wave patterns.
Knowing which waves happened currently and which will likely be happening will help you estimate what stock prices are likely to do next.
Different Phases of Elliott Wave Theory
1) Impulse Wave Phase
Impulse wave phase is made of 5 sub-waves. Three of them are known as motive waves, and two are corrective waves. It is usually labelled as a 5-3-5-3-5 structure. Generally, this pattern is the most common motive wave, easiest to spot in the market.
The impulse wave has three rules that define its establishment. These rules are unbreakable. If one of these rules is violated, then the structure will not be called an impulse wave. These three rules are as follows.
a) Wave 2 cannot retrace more than 100% of wave 1.
b) Wave 3 can never be the shortest of the three impulse waves.
c) Wave 4 can never overlap wave 1.
This pattern is also known as the motive phase.
2) Corrective Wave Phase
This phase is consist of 3 or a combination of three sub-waves. It is a downward /countertrend that follows the uptrend.
This phase incorporates three waves of distinctive price movements.
a) A Wave Down
b) A Correction Up
c) Another Downward Wave
The main goal of this phase is to move the market in the direction of the trend.
Which Phase is Better for Trading?
• During the impulse phase, the trader has a greater chance of profit as the stock price makes the most considerable movement.
• You should buy during a corrective wave on the uptrend and wait to sell until the next impulse wave has taken the stock price up.
Winding Up
In summary, Elliott Wave Theory provides a sense of structure to markets continuously for many people globally. Purchasing and selling into a market have always required your research, and it will continue forever. However, you can use Elliott Wave Theory to make an informed decision as per the two phases in which the market is currently in. Even you can use this principle in conjunction with other trading strategies like Fibonacci Retracement.
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