Elliott Wave Theory Formula

Ralph Nelson Elliot around 1939 developed the Elliott Wave Theory. Under the name of the Wave Principle, he compiled all the work that he had published in the "Financial World" magazine. It was a series of twelve articles on the behavior and fluctuations of the stock market.

 His theory is based on the movements of prices through the waves that compose it. Elliott developed his theory based on the "Dow Theory" by Charles Henry Dow, the forerunner of technical analysis, but took it one step further.

Principles of Dow's theory

Dow's theory is based on two main pillars:

●        The bull markets are divided into three bullish sections. The first impulse after a phase of accumulation taking advantage of the panic state of the market. Next, a second impulse due to market optimism and finally, a third impulse because of market euphoria.

●        After that, there is a stretch of a trend that helps in a proportional correction ranging from 30 to 60% of the total of the previous bullish section.

As we can see, Dow bases his theory on the psychology of the masses and how this affects the price of shares in the markets.

Now, let’s see how Elliott Waves take it one step further.

Basic principles of Elliott Wave Theory

Elliott raises the idea that all economic cycles (from the shortest to the longest) are structured in eight waves. Of these waves, three are bullish impulses with two corrections and then two of descent that form the correction of the previous bullish movement. This is the most common scheme with which they are presented, although sometimes they may suffer variations in their structure.

The main bases of the Elliott Wave Theory can be learned easily. Even so, those who approach this theory for the first time will rarely succeed with the possible evolution of the market using this system.

Elliott Wave Theory Formula

In the Elliott Waves, you will find Bullish Module 5-3. The Elliott Wave Theory states that a first five-wave bullish phase forms a complete bullish market cycle. Waves 1, 3, and 5 are impulsive, and waves 2 and 4 are corrective. After this, movement of higher degree comes, and the so-called correction waves are formed by three waves, A, B, and C.

Of these three waves, A and C will be considered bearish impulses, and B is a corrective wave. Everything needs to work as per the Elliott Wave Theory formula.

However, one of the details that we need to take into account is that the Elliott Wave Theory is only applicable in highly liquid securities or markets. So, in markets of low trading and low liquid securities, Elliott Wave theory will have no effect. Nevertheless, it is worth knowing about Elliott Wave Theory if you are a stock market enthusiast. It helps in understanding the market in ways that no other theory does. So, knowing this theory briefly is also immensely helpful in understanding market psychology in the long run.