Developed by Ralph Nelson Elliott in the 1930s. Elliott discovered that financial markets move in repeating patterns, which he called waves.
Identifying wave patterns can be key to your strategy because it is possible to predict market trends easily.
Let's get down to business, let's get started.
What is Elliott Wave Theory?
The theory is based on the idea that financial markets move in repetitive cycles of expansion and contraction.
These cycles are divided into impulsive and corrective waves. Impulsive waves are those that go in the direction of the main trend, while corrective waves are those that go against the trend.
Why is it important to identify wave patterns?
Simple, because you can determine when to buy or sell an asset.
For example, if you as an investor identify an impulsive wave to the upside, you can decide to buy an asset before the price goes even higher. On the other hand, if you identify a corrective wave to the downside, you have the possibility to sell before the price falls further.
The three types of waves according to the Elliott Wave Theory
According to Elliott Wave Theory, there are three types of waves: impulsive waves, corrective waves and minor degree waves.
Impulsive waves are those that go in the direction of the main trend and are divided into five sub-waves.
Corrective waves are those that go against the main trend and are divided into three sub-waves.
Minor degree waves are those within the impulsive and corrective waves and are divided into five sub-waves.
Let us know in the comments if you would like us to delve deeper into each of the sub-waves in another article.
How do you identify wave patterns?
We need to use specific tools and techniques. The most common ones include charting and Fibonacci retracements.
Charting, as you know, helps us visualize wave patterns and determine when to buy or sell. Fibonacci retracements help us read the big picture to know when a correction has ended and when a new trend has begun.
It is important to avoid common mistakes such as overinterpretation or lack of patience.
To avoid these common mistakes, it is important to have a clear and accurate understanding of technical analysis and to use specific tools such as charts and Fibonacci retracements.
Where and how to invest money are two questions with constantly evolving answers. Understanding how repetitive financial market cycles work and how to use tools like Fibonacci retracements combined with cutting edge technology tools almost guarantees us a 2024 full of successful trades.
See you soon, trader!
For this article, prompts have been used to request information
interpreted and provided by AI (Google Bard). Written and edited
by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez