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The “wave principle” is the discovery by Ralph Nelson Elliott that social or mass behavioral patterns change and change in recognizable patterns. Using stock market data for the Dow Jones Industrial Average (DJIA) as his primary research tool, Elliott found that the ever-changing stock market price path demonstrates a structural design that in turn reflects the fundamental harmony inherent in nature. From this discovery, he developed a rational market analysis system.
According to the Wave Principle, each market decision is made with the help of significant information and gives significant information. Each transaction, although it is immediately an effect, is included in the market structure and, transmitting transaction data to investors, joins the chain of reasons for the behavior of others. This feedback loop is governed by the social nature of man, and since he has such a nature, the process gives rise to forms. As forms are repeated, they have predictive value.
Elliott identified thirteen “waves,” or patterns of directional movement, that are repeated in the markets and are repeated in shape, but not necessarily repeated in time or amplitude. He named, defined and illustrated the patterns. He then described how these structures come together to form larger versions of the same patterns, how they, in turn, are the building blocks for the next larger patterns, and so on. His descriptions are a set of empirically derived rules and guidelines for interpreting market actions. Patterns that naturally occur in accordance with the Wave Principle are described below.
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