He found these trends tended to follow mostly recognizable patterns and tended to repeat themselves over and over again. It's a revamp of the old saying that history always repeats itself. I think you would agree that the history of human life does seem to continuously repeat itself. The repetitions are rarely exact but the same patterns or trends seems to keep coming to the forefront.
Another relationship that Mr. Elliott discovered and is a part of the Elliott Wave is that human trends and thus the stock and market behaviors tend to reflect a compatibility with nature and some of the natural rhythms of life. His work revealed a set of rules to guide him in trading the stock market and
practically anything else which is freely traded in the open market without governmental interference and control.
He called the repetitive patterns he found waves and also discovered how the waves react with each other to make larger and smaller waves. Many of the patterns are identical only being different in the time or amplitude being used for the analysis. This is one of the beauties of the Elliott Wave. You
can use monthly data, weekly data, daily data, hourly data or any smaller data time that you can get access to. You will find Elliott Wave patterns in all data periods and can use them to help you in your trading.
In my opinion, the Elliott Wave Theory is THE best predicting tool available for the stock markets and the stocks that make them up but it is really not a predicting tool. The theory is a labeling of how the markets and stocks behave in the past. By learning the past with the Elliott Wave, you are then able to predict the future; with at least to some degree of accuracy.
One of the reasons the Elliott Wave is so difficult to use for most new analysts is the number of possible wave counts which are always present in any stock or market that you are trying to analyze. There are always different valid wave counts, some of which foretell of positive moves to come. At the same time and using the same data, there will also be perfectly valid wave counts which predict downward moves or wave.
The Elliott Wave is an art much more than a science. It has rules which could be considered science and are easily identified and used to your advantage. The correct counting of the waves is, by far, the most important part of the theory and that is much more of an art than science. If you can get the wave counts correct, most of the time, you will also be right in your trading most of the time. That can only lead to greater and greater profits building up in your account.
I have used the Elliott Wave for 20 plus years and feel that I am still learning. The most simple of rules are easy to see and follow but there are so many and with multiple possibilities always present, it is sometimes a study in frustration. This is especially true when you have your money backing what your wave counting predicts.
There are many computer programs available for hundreds to thousands of dollars to aid you in your counting of the Elliott Wave but I would ask that you do not use them. To fully understand the principle behind the waves, you need to look at the analysis and do the charting and counting for yourself. In this way you learn the basics and proceed up from there. By starting at the bottom and learning the principles yourself, you always have a base of knowledge you can go back to for help
and additional studies.
It is much like modern school children only learning to do multiplication and division with the use of calculators. They can learn to do it much faster and much more accurately but they will never really understand the concepts behind it because they have really never had to do the basics which are
necessary to understand the principles thoroughly.
With the Elliott Wave, I feel you MUST learn those concepts and the rules to fully put it to use. Learn it the hard way and you really will understand and just not have something or someone telling you what it or they think is correct.
The first and most simple rule of the Elliott Wave
The very first rule of the Elliott Wave Principle is the rule of 5 waves followed by a 3 wave correction.
For this example, I have used a pattern that is a 5 wave move to the upside. This 5 wave move actually consists of 3 up moves and 2 down or corrective waves. The first, which is labelled as wave 1, is an up wave followed by wave 2 which is a corrective wave for wave 1. Then wave 3 follows the bottom of wave 2 and is another wave to the upside. Wave 4 starts after wave 3 tops out and is a corrective wave for the previous wave 3. Finally after wave 4 makes a bottom, wave 5 takes
place to the upside.
This entire 5 wave move is then followed by a 3 wave correction to the downside. While the small waves 2 and 4 contained within this 5 wave structure only correct for the wave immediately preceding it, namely wave 1 and 3, the following move down corrects for the entire formation or all 5 waves of the previous structure.
This correction is labelled normally as an ABC correction. In this example, Wave A is a downward move and wave B then corrects wave A and moves in the opposite direction. Wave B will top and a wave C will take place
After this formation is completed there are multiple possibilities on the next sequence and we will get to those at a later time. For now, start to look at you charts and see if you can count the above wave pattern and recognize it. Sometime it literally blasts off the chart at you and at other times it is very much camouflaged.