Who is Elliot Waves?
The Elliot Waves theory is a technical analysis method used in the stock market to predict the direction of market trends. The theory was developed by Ralph Elliot in the 1930s and is based on the idea that market prices follow a repeating pattern of five waves in the direction of the trend and three waves in the opposite direction. These five waves are known as the motive waves and the three waves are known as the corrective waves.
The motive waves move in the direction of the trend and are characterized by impulse and momentum. The first wave is typically the strongest and is followed by a smaller second wave, which is then followed by a larger third wave. The fourth wave is typically smaller than the second wave and the fifth wave is the largest and often marks the end of the trend.
The corrective waves move in the opposite direction of the trend and are characterized by a slowing of momentum. The first corrective wave is typically shallow and is followed by a deeper second wave. The third corrective wave is typically shallow again and marks the end of the corrective phase.
The Elliot Waves theory is based on the idea that the stock market reflects the emotions of investors. As investors' emotions change, so do the market trends, creating repeating patterns that can be identified and used to predict future market movements.
Simplified Example
The Elliot Waves theory is like a game of catch. Imagine you and your friend are playing catch with a ball. You throw the ball to your friend and they throw it back to you. You do this over and over again, and each time you throw the ball, it goes a little further. This is like the stock market. The stock market goes up and down, just like the ball going back and forth between you and your friend.
The Elliot Waves theory says that the stock market moves in patterns, like how you and your friend throw the ball back and forth. Sometimes the stock market goes up, just like you throwing the ball to your friend. And sometimes the stock market goes down, just like your friend throwing the ball back to you.
The Elliot Waves theory helps people who buy and sell stocks understand these patterns, so they can make smart decisions about when to buy or sell. Just like when playing catch, if you can predict where the ball is going, you can be ready to catch it. In the same way, if you can predict the pattern of the stock market, you can be ready to buy or sell your stocks at the right time.
Who Invented the Elliot Waves theory?
Ralph Nelson Elliott is credited with coining the term "Elliott Wave Theory" in the 1930s. Formulated from his meticulous observations of the stock market, Elliott discerned recurring patterns in price movements that he attributed to underlying investor psychology. Publishing his insights in a series of books and articles, Elliott laid the foundation for the theory, which has since garnered widespread acceptance and popularity among technical analysts studying market trends and behavioral patterns.
Examples
Apple Inc. (AAPL) - Apple Inc. is a popular stock among traders who use the Elliot Waves theory. The stock has a long history and has experienced several market trends, making it an ideal candidate for the application of the Elliot Waves theory. Traders can use the theory to identify market trends and make predictions about future price movements of the stock.
Amazon.com Inc. (AMZN) - Amazon.com Inc. is another popular stock that traders often use the Elliot Waves theory on. Amazon has a large market capitalization and is considered a bellwether of the technology sector, making it a popular choice for traders looking to use the Elliot Waves theory.
Tesla Inc. (TSLA) - Tesla Inc. is a relatively new stock that has seen rapid growth in recent years. The stock has experienced several market trends, making it an ideal candidate for the application of the Elliot Waves theory. Traders can use the theory to identify market trends and make predictions about future price movements of the stock.
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