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Elliot Wave Theory Essay

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The Elliot Wave theory is used to how a stock will behave in future by correlating crowd psychology with the stock price trends. In theory uses the swing in crowd psychology from pessimism to optimism is used as a basis for identifying patterns in the charts of the stock prices.

THE DISCOVERY
The theory was discovered by Ralph Nelson Elliot (1871-1948), a professional accountant in the 1930s. Elliott published his theory of market behavior in the book The Wave Principle in 1938.

THE THEORY
In Elliott 's model, market prices alternate between two phases - impulsive or motive and corrective phase. Impulses are always divided into a set of 5 lower-degree waves. There alternate again between motive and corrective character, so that if waves 1, 3, and …show more content…

However, this wave does not break the high of the Wave A and head and shoulders pattern may be seen.
The Wave C is a strong downward wave which confirms that bull market is over and bears get aggressive. Bulls suddenly realize they have been caught on the wrong side and soon they too start selling to cut their losses. The wave is an extension of Wave A by 1.618 times.

FIBONACCI RELATIONSHIP
Elliott believed that the number of waves that exist in the stock market 's pattern is reflected in the Fibonacci sequence of numbers. Fibonacci numbers are intriguing in that any number is approximately 1.618 times the preceding number and approximately 0.618 the following number. The relationship between the lengths of waves of an Elliot wave model to a huge extent seems to carry the Fibonacci number relationships.
CRITICISM OF ELLIOT WAVE
The Elliott Wave is considered by many as hypothetical theory and it contradicts the concepts of price and volume actions. It depends on crowd psychology and this may not be a valid reason to go with all the time. It sounds much of a subjective way of analysis and as such this is cannot be a valid way of analysis all the

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