What is the Elliott Wave Principle you ask?
the Elliott wave principle is a method of reading the patterned human behavior of crowds by it's effect on market prices.
Crowd behavior is completely different from individual behavior, this was demonstrated by Solomon E. Asch in his famous study "Opinions and Social Pressure".
Individuals tend to leave thinking to the 'crowd', as you can see in this demonstration, and crowds tend to shift from optimism to pessimism naturally.
Elliott proposed that social mood swings are patterned, and appear in the price movements of markets.
These movements then tend to follow the Elliott wave model.
The Elliott wave principle offers traders a model for the likely path of prices, which allows the trader to make forecasts for the future path of prices based on the model.
The Elliott wave model says that the price will trace out five 'waves' in the direction of the trend and then will correct in three waves against the trend.
Once you master the wave counting methods, this knowledge becomes very useful because:
If you know the likely trend, and you know where the price is within that trend.
You can use this information to place a low risk trade to catch the trend as it progresses.
And, with practice, the Elliott wave cycle can be leveraged to make predictions of future market movements.
There are 2 main categories of wave form.
CORRECTIVE waves.1. The Elliott Wave Cycle: -
So; what is the Elliott wave principle then?
The complete Elliott wave cycle involves a five wave move in the direction of the trend, known as the 'motive' part of the Elliott wave cycle.
This is followed by a three wave counter trend move, which usually retraces some 50% of the five wave pattern, known as the corrective part of the Elliott wave cycle.
Motive waves accelerate the market and move the price along, these the trend waves brake into 5 separate moves.
Corrective waves are usually in 3 moves, they tend to overlap and make less progress than motive waves.
After a full Elliott wave cycle, the price makes a net move in favor of the larger trend.
How to identify Elliott waves:
If you familiarize yourself with the 5/3 pattern shown,
and the general rules and guidelines of wave formation.
This will help you to identify Elliott waves with more precision.
You can then learn the various corrective wave patterns,
and that will help map the current position of the price within the larger framework.