The market could be compared to a wild jungle or an angry ocean. When you’re cruising through it, you need to know several paths through which you can travel and reach your destination safely. In the Stock market or commodity market, technical analysts use stock chart patterns to identify the trajectory of where a stock goes.
We won’t be going deep into every single chart pattern but a specific one caught our attention.
“The Elliot Wave Pattern”
So without further delay, let’s begin!!
The Elliot Wave theory:
In the 1930s, Ralph Nelson Elliot created the Elliot Wave Theory. He believed that the stock market was not a random phenomenon, but there was a specific behaviour behind it. However, the story was different.
The market worked in repetitive patterns, and he understood that it can be tracked.
In simple terms, the Elliot Wave Theory is a method of technical analysis that is used to look for long-term price patterns that are directly related to consecutive changes in investor sentiment and based on their psychology.
The logic behind the pattern relies on identifying impulse waves that usually create a pattern and then correct themselves to oppose the larger trend.
Similar to a sandwich, each wave is safely placed with large sets of waves and technical analysts follow this trend.
Elliot Wave Theory – The logic behind the waves:
The next part is going to be a little complicated but stick with us!!
The Elliot wave theory can be interpreted in the following ways:
Five waves move in the direction of the main trend just like a child follows their mother. This is followed by 3 waves in a correction method.
This 5-3 move then splits and becomes 2 subdivisions of the next higher wave move.
The inner waves having a 5-3 pattern usually remain constant through time.
The following chart will give you a better idea of what we’re talking about.
The waves that are numbered 1,2,3,4 and 5 form something called an impulse. It can be compared to the pulse of a person.
The points marked as A, B and C are called ‘form correction’. This pattern then repeats, resulting in the formation of wave 1 at the following largest consecutive trend and wave 2 at the following largest degree for the three-wave corrective.
The corrective wave typically consists of three independent price movements: A, C, and B, two of which are directed towards the main correction. Waves 2 and 4 in the above picture are corrections. These waves typically have the following structure:
Hence, this is what’s known as an Elliot wave that consists of trends and also countertrends.
Elliot Wave Degrees:
Elliot had identified 9 degrees of waves, which he explained as follows. This is numbered as per largest to smallest trend:
1. Grand Super Cycle
2. Super Cycle
3. Cycle
4. Primary
5. Intermediate
6. Minor
7. Minute
8. Minuette
9. Sub-Minuette
Conclusion:
The different types of patterns in the market are several and we’ll be covering them one by one.
The analysts that use the Elliot wave pattern say that the market is easily predictable. In a metaphor format, the Scientists recognize a tree as a trend line, however, they cant ascertain where the branches go to. Like all patterns, there are people who utilize it and people who don’t.
Technical analysts may be divided in the accuracy of this theory, however, this is one of the basic concepts that technical analysts focus on.
We’ll be back with more educational blogs like these, so until next time, trade safely.
Commodity Samachar
Learn and Trade with Ease