01The Wave Principle

In the 1930s, Ralph Nelson Elliott discovered that market prices trend and retrace in recognizable patterns. Each pattern repeats in shape, but its size and duration can vary from one occurrence to the next.

He identified five basic patterns, or waves, that keep appearing in price data, and described each one along with its variations. He then showed how these waves join to form a larger version of the same pattern, which in turn becomes part of an even larger one, and so on at every scale. Hence the fractal nature of the market.

Why five waves forward and three back? It is the simplest structure that lets a market both make progress and correct along the way.