What is the Wave Principle?
The Wave Principle is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns.
One of the easiest places to see this phenomenon at work is in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify repeating patterns in prices, and figure out where in those repeating patterns we are today, then you can predict where we are going in the future.
The Elliott Wave Principle is named for its discoverer, Ralph Nelson Elliott.
Waves
Elliott proposed that trends in financial prices resulted from investors’ predominant psychology. He found that swings in mass psychology always showed up in the same recurring fractal patterns, or “waves,” in financial markets.
Elliott’s theory somewhat resembles the Dow theory in that both recognize that stock prices move in waves. Because Elliott additionally recognized the “fractal” nature of markets, however, he was able to break down and analyze them in much greater detail. Fractals are mathematical structures, which on an ever-smaller scale infinitely repeat themselves. Elliott discovered stock index price patterns were structured in the same way. He then began to look at how these repeating patterns could be used as predictive indicators of future market moves.