A technical analysis framework that identifies recurring wave patterns in price movements, proposing that markets move in five impulsive waves followed by three corrective waves.
The Elliott Wave Structure
Developed by Ralph Nelson Elliott in the 1930s, this theory proposes that market prices unfold in recognizable patterns driven by collective investor psychology. The basic structure consists of five waves in the direction of the main trend (labeled 1-2-3-4-5) followed by three corrective waves (labeled A-B-C). This 5-3 pattern repeats at every time frame, creating a fractal structure.
Wave Rules and Guidelines
Three unbreakable rules define valid wave counts: Wave 2 never retraces more than 100% of Wave 1. Wave 3 is never the shortest of the three impulse waves (1, 3, 5). Wave 4 never enters the price territory of Wave 1. Beyond these rules, guidelines such as Wave 3 typically being the strongest and extending to 161.8% of Wave 1 (using Fibonacci Extension) help traders project targets.
Elliott Waves in Forex Trading
Forex traders use Elliott Wave analysis to identify where the market sits within the broader cycle. If EUR/USD appears to be in Wave 3 of an uptrend, the trader expects strong bullish momentum. If the pair seems to be completing Wave 5, a corrective A-B-C decline may follow. Fibonacci Retracement levels help measure corrective waves (Wave 2 often retraces 50-61.8% of Wave 1), while extensions project impulse wave targets. The theory has a steep learning curve but provides a comprehensive framework for understanding market structure alongside Dow Theory.
Related Terms
Dow Theory
One of the oldest frameworks in technical analysis, developed by Charles Dow, which identifies market trends through a series of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend).
Fibonacci Retracement
A technical analysis tool that uses horizontal lines at key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%) to identify potential support and resistance levels where price may reverse during a pullback.
Trend
The general direction of price movement over time. Prices trend upward (higher highs and higher lows), downward (lower highs and lower lows), or sideways.
Technical Analysis
The study of past price action, volume, and chart patterns to forecast future market movements, based on the premise that price reflects all available information.
Ready to trade live?
XM Group. Our pick for beginners. Regulated by CySEC, ASIC, DFSA and IFSC, $5 minimum deposit, micro lots available.
75.33% of retail CFD accounts lose money when trading with this provider.