In the 1930s a professor called Ralph Nelson Elliott proposed that the market prices unfold in specific patterns. His theory about predicting the market that the market prices unfold in specific patterns is called the Elliott waves. In 1938 the professor published the book The Wave Principle that contained his theory about the market behavior.
The structure Elliott describes consists of a five pattern. In an up going market is the pattern that wave 1 move upward and 2 downward. The 3 moves up and the 4 down. The last one moves upward.
1, 3 and 5 are the market direction. 2 and 4 are counter for 1, 2 and 3. There are 3 basic rules that must be met. The rules are:
(1) 2 will never move below 1.
(2) 3 is never the shortest.
(3) The lowest point of 4 can never enter the high of 1.
The 1 to 5 patterns are called the motive waves. A constructive pattern is consisting of an ABC pattern. In an up going market the motive pattern will end with a constructive pattern. In a graph 5 will fall to A. A will rise to B and then fall to C.
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In analysis the market the traders will experience that the motive waves can be divided into 5 waves. Illustrated in a graph in an up going market is 1 divided into 5 waves and ended with a constructive pattern. The constructive pattern is 2 that is divided into an ABC pattern. The market will move from 2 to 3 and the moves will be divided into 5 waves and end with and ABC patterns. The constructive pattern is 4. The same will be the case for 5 as for 1 and 3.