Introduction to Elliot Wave Theory

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Video Transcription:

Hello, traders. Welcome to the Elliott Wave Theory course, and the first module, Introduction to the Elliott Wave Theory. In this lesson, we’re going to learn or we’re going to understand what the Elliott Wave principle is. And what we’re going to learn in this lesson is actually very important, because we are going to go through what the EWP is and we’re going to learn a little bit about its history and its discovery.

Elliot Wave Theory

Now let’s start by defining what the EWP is. The Elliott Wave Principle reveals that mass psychology swings from pessimism to optimism and back in a natural sequence. This means that in the financial markets we go from bearish to bullish and back in a natural sequence, and this creates natural, specific, and measurable patterns in the market. And this is what the EWP is all about, identifying repeating patterns in price and supports where we are in those patterns today so you can predict where price is going to be in the future. And this is going to be very helpful in your trading if you are a technical analyst. This gives you an advantage as a trader and investor, because if you are able to identify these patterns in the market and you are able to support where price is right now, you are going to be able to predict where price is going to be in the near future.

So in order for you to fully understand the EWP, you need to grasp the idea that events external to a financial market don’t have consistent effect on their progress. This means that the EWP doesn’t use anything but price action and investor psychology to calculate the probability that the market will move in one direction. It’s important for you to understand that we are not looking through a crystal ball here. We are just calculating probabilities that the market will move in one direction given the current position of price in the markets held within the structure that we just spotted.

Now a trader who uses the EWP as his main technical tool is able to identify the market structure and anticipate the most likely next move given the current position within that structure. Now this is basically what the EWP is, okay? You are going to learn how to identify these big structures and you are not going to be concerned about external events to a financial market. This means that we are not going to be concerned about news. We are not going to be concerned about economic or social breaking news that might impact the markets in a very short term. We are going to only be concerned on the market structure and its overall price action.

Elliot Wave Principle explained

Now let’s go and let’s have a look at a little bit of history behind the EWP. So Ralph Nelson Elliott was the man who discovered the structures in price constructed by mass psychology, and this is why the Elliott Wave Principle is named after him. Ralph Nelson Elliott started charts of the Dow Jones Industrial Average with such thoroughness and precision that he identified hundreds of repeating structures that cover all market price action up to the mid-1940s. What he did, he didn’t identify hundreds of structures. He identified the same structures being repeated over and over hundreds of times. That is why at the time and using his principles, Elliott predicted a great boom market when no one expected that the Dow could break its 1929 peak. And here is a chart of the Dow Jones Industrial Average over a hundred years. You can see that this is the 1929 peak and Ralph Nelson Elliott predicted this great boom market where we are right now when no one expected that we could break this peak after the Great Depression.


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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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