Elliot waves constructed around the author's belief that a business cycle consists of a five-wave impulse and a corrective three-wave. A pattern stimulus is represented by five waves consists of a separate move in the same direction.
Elliott wave pattern must meet the following conditions:
Wave 1 > 2 < w.="" 3=""> w. w. 4< w.="">
A corrective amount consists of three waves involves a countertrend toward the opposite side of the previous pattern.
The corrective pattern must meet the following conditions:
Wave A > Wave B< wave="">
There are other patterns within Elliott waves (zigzags, triangles, etc) but the impulse and corrective elements is the most used, when it comes to technical analysis of trends.
Here is a brief overview of the psychology of herd the list behind the theory about Elliott waves:
Wave 1. The price makes the first upward movement as few people believe has room to grow
Wave 2. This group of people feel the asset has run Rally and receives profits. However, this does not make it to the previous lows as most people believe that still has room to grow
Wave 3. The product is now caught the attention of the public-this is usually the longest and strongest wave. Price increases, usually beating high wave 1.
4 Wave. Traders taking profits off strong Rally but there are still some dip-buyers in the market, causing this wave is generally weak
5th Wave. People realize that the price is driven by market speculation. Contrarian investors start shorting the stock, and we are back at the beginning of wave 1.
Elliott suggested that waves that existed on multiple levels, which could be waves in waves.
There are two ways of hypothecation Elliott waves when trading the financial markets. The first and most immediate ones involves determining where the current value is within the current cycle wave Elliott. Then you can forecast price direction and size in the next wave in the circle.
The second use involves using Elliott wave oscillator is based on a standardized methodology-moving average convergence divergence (MACD). A common setting is using moving average 5-period as the basis for the moving average index and a moving average 35-period as the basis for the moving average. You can then plot the remaining difference between the two and to determine where you are in the pattern 5-3.
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