Elliott Wave Principle
In his 1938 book, The Wave Principle, and then in a series of articles published in 1939 by Financial World, R.N. Elliot noted that the stock market reverses in accordance with the basic rhythm or pattern of five waves up and three waves down to form a complete cycle of eight waves. A diagram of five waves up, followed by three waves down, is shown in Figure 1-2.
One complete cycle, consisting of eight waves, consists of two separate phases: the motion phase (also called the "five"), whose waves are indicated by numbers, and the correction phases (also called the "three"), whose waves are indicated by letters. Sequence a, b, c corrects sequence 1, 2, 3, 4, 5 in Figure 1-2.
At the end of the eight-wave cycle shown in Figure 1-2, a second similar cycle of five rising waves begins, followed by three descending waves. Then the third step develops, also consisting of five waves up. This third movement completes the five-wave movement one degree more than the waves of which it consists. The result is shown in fig. 1-3 up to a peak (5).
At the peak of wave (5), a downward movement of a correspondingly greater degree, consisting of three waves, begins. These three big waves down "correct" the whole movement of the five big waves up. The result is another complete, but longer cycle, as shown in Figure 1-3. As shown in Figure 1-3, each component in the same direction of the driving wave and each component of the complete cycle (i.e., waves 1 + 2 or waves 3 + 4) of the cycle are a smaller version of itself.
It is important to understand the essential point: Figure 1-3 not only illustrates an enlarged version of Figure 1-2, it also illustrates Figure 1-2 in more detail. In Figure 1-2, each subwave 1, 3 and 5 is a driving wave, which is divided into “five”, and
each subwave 2 and 4 is a correction wave, which is divided into a, b, c. Waves (1) and (2) in Figure 1-3, if examined under a microscope, would take the same shape as waves  * and . All these figures illustrate the phenomenon of a constant form in an ever-changing degree.
The composite structure of the market is such that two waves of a certain degree are subdivided into eight waves of the next lower degree, and these eight waves are divided in exactly the same way into thirty-four waves of the next lower degree. Thus, the Wave Principle reflects the fact that waves of any degree in any row are always subdivided and subdivided into waves of a lesser degree and at the same time are components of waves of a higher degree. So we can use Figure 1-3 to illustrate two waves, eight waves or thirty-four waves, depending on the degree to which we are referring
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Elliott Wave Principle