Ralph Nelson Elliott developed the profit hack “Elliott Wave Theory” in the 1930s with one goal.
To decipher the cyclical nature of the financial markets and predict price movements.
Today, it remains a valuable tool for navigating market chaos, and if you understand how it works, it could be your secret weapon for consistent cash flow in this tricky market.
The Elliot Wave Theory is based on the premise that price movements are repetitive. And it follows a pattern of waves consisting of impulsive and corrective phases.
- Wave 1: The initial wave in a new trend, often starting after a correction. It indicates the beginning of a bullish or bearish sentiment.
- Wave 2: A corrective wave following the first impulse, but not as strong as #1.
- Wave 3: This is the longest, strongest, most substantial, and extended wave. It often exceeds the high (in a bull market) or low (in a bear market) of Wave 1.
- Wave 4: Another corrective wave that retraces some of the gains from Wave 3.
- Wave 5: The final wave in the series indicates the end of the trend.
These five waves are followed by three waves in a correction (totaling a 5-3 move).
Waves 1, 2, 3, 4 and 5 form an impulse, while waves A, B and C form a correction.
The corrective wave normally has three distinct price movements:
Two in the direction of the main correction (A and C) and one against it (B).
The underlying 5-3 pattern stays constant, though the time span of each wave may vary.
Here are typical applications of The Elliott Wave Theory in the financial markets (including various timeframes, from intraday trading to long-term investments).
- Traders use the Elliott Wave Theory to identify and predict potential trends.
- Traders set price targets based on the anticipated completion of specific waves.
- Wave patterns help traders place stop-loss orders and manage risk effectively.
- Elliott Wave analysts often develop trading strategies that align with wave patterns, such as trend-following and counter-trend strategies.
- The theory allows traders to adapt their strategies to different investment horizons.
Like most strategies, the Elliot Wave Theory has its detractors. But we still use it frequently to find entry points in new trends and exit trades with substantial gains or as I like to call it “profit hack”.
If you’d like to see it in action, see how we use it for big energy profits.