Elliott Wave Theory

In a theory proposed by R. N. Elliott in 1938, the market moves in regular, repeated waves or cycles.

Five impulsewaves + Three corrective wave.

Waves in the direction of the trend consist of five subwaves, and counter-waves consist of three subwaves.

Elliott discovered that market waves follow patterns that are ratios of the numbers in the Fibonacci sequence.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34 …

1/2 = 0.50, 2/3 = 0.6667, 3/5 = 0.6, 5/8 = 0.625, 8/13 = 0.6154…

2/1 = 2, 3/2 = 1.5, 5/3 = 1.6667, 8/5 = 1.600, 13/8 = 1.6250…

These ratios converge around 1.618.

[Practice Problems] In 1938, R. N. Elliott proposed a theory that equity markets move:

A. in stochastic waves.

B. in cycles following Fibonacci ratios.

C. in waves dependent on other securities.

[Solutions] B