Elliott Wave theory was developed by Ralph Nelson Elliott during the 1930s. Elliott analyzed the trading data of more than 70 years and came to the conclusion that, rather than the popular belief that the stock market works chaotically, it actually follows a discipline. He gathered enough evidence to support his theory when he was 66 years old. He wrote a book called `The Wave Principle’ describing his principles.
According to Elliott, the market follows a repetitive cycle. The cycles were the emotions of the traders. These emotions were influenced by outside elements like media, public discussion etc. He explained that the uptrend and downtrend in the market were following repetitive patterns. He called these swings as `waves.’ He though it would be possible to predict the future direction of a stock if it’s repeating patterns could be identified. At this point, Elliott’s theory becomes attractive for the traders as he promises to find out the possible reversal point. Said otherwise, Elliott discovered a way of catching the tops and bottoms of various stocks.
Elliott Wave theory includes three fundamental corrective patterns, which are- zigzag, flat and triangle. These three patterns create 21 types of patterns to be found in the chart. Expert forex traders admitted that they have found waves in their trading charts. However, doing so takes hours of practicing. You should dedicate enough time to get yourself comfortable with the theory. Once you have got the basics, the Elliott waves will soon be an integral part of your stock market trading strategy.