Basic Guide to Understanding Elliott Wave

Elliott Wave Guide

Nearly every student to technical analysis as heard of the Elliott Wave Theory and is probably fascinated by the concept.  However, despite its popularity, Elliott Wave is also the least correctly understood theory of technical analysis.  Too many traders have found the numerous rules behind Elliott Wave Theory to be overly complicated and subjective.  For those who correctly understand the rules, Elliott Wave Theory has proven to be a reliable basis for interpreting and forecasting price action.  For those who misinterpret the rules, incorrect forecasting will lead many to conclude the Elliott Wave Theory is obsolete.  Nevertheless, many traders have used Elliott Wave Theory to successfully identify turning points in price action.

How to Count Waves

Before understanding the waves within the Theory, it is important to remember the tenet that every action creates an opposite reaction.  Applying this thought to Elliott Wave, let us take a look at the most basic structure.  The center of the Elliott Wave Theory rests on the idea that security prices move in waves:

Impulsive Going in the direction of the underlying trend and Corrective (going against the underlying trend.  Note that there are 5 impulsive waves and 3 corrective waves.  There are of course waves within waves that we will touch upon later in the guide.

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