By understanding the Wave Principle, you can antici-pate large and small shifts in the psychology driving any investment market and help yourself minimize the emo-tions that drive your own investment decisions.
“The Wave Principle” is Ralph Nelson Elliott’s discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Using stock market data for the Dow Jones Industrial Average (DJIA) as his main research tool, Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature. From this discovery, he developed a rational system of market analysis.
Under the Wave Principle, every market decision is both produced by meaningful information and produces meaningful information. Each transaction, while at once an effect, enters the fabric of the market and, by communicating transactional data to investors, joins the chain of causes of others’ behavior. This feedback loop is governed by man’s social nature, and since he has such a nature, the process generates forms. As the forms are repetitive, they have predictive value.
Elliott isolated thirteen “waves,” or patterns of direc-tional movement, that recur in markets and are repetitive in form, but are not necessarily repetitive in time or ampli-tude. He named, defined and illustrated the patterns. He then described how these structures link together to form larger versions of the same patterns, how those in turn are the building blocks for patterns of the next larger size, and so on. His descriptions constitute a set of empirically derived rules and guidelines for interpreting market ac-tion. The patterns that naturally occur under the Wave Principle are described below.
- The Basics
- Motive Waves
- Corrective Waves
- Guidelines of Wave Formation
- The Fibonacci Sequence and its Application