Elliott Wave Theory
A technical analysis framework proposing that prices move in recognizable, repeating patterns of five waves in the direction of the main trend followed by three corrective waves against it.
Elliott Wave Theory is a technical analysis framework proposing that market prices move in recognizable, repeating wave patterns reflecting collective crowd psychology: a five-wave pattern moving in the direction of the larger trend (three "impulse" waves in the trend's direction separated by two smaller corrective waves against it), followed by a three-wave corrective pattern moving against that trend. These wave patterns are said to repeat at multiple scales, nesting within larger waves of the same basic structure.
Elliott Wave analysis is widely regarded as one of the more subjective technical analysis frameworks, since identifying exactly where one wave ends and another begins often involves considerable interpretive judgment, and different analysts can reasonably disagree about how to label the same price history using the theory's rules. Proponents argue its flexibility lets it capture genuine, repeating patterns in crowd psychology across different timeframes, while critics argue that same flexibility makes the framework difficult to definitively test, falsify, or apply consistently going forward.
Examples
- An Elliott Wave analyst might label a price history as being in the third of five impulse waves, implying a larger continuation is still likely before a corrective phase begins.
- Elliott Wave Theory's wave-counting rules involve considerable interpretive judgment, which is why different analysts can reasonably label the same price history in different ways.