Understanding Elliott Wave Motive and Corrective Patterns

Elliott Wave Theory

Elliott Wave Theory is a technical analysis approach that attempts to predict future market trends based on collective investor psychology. The theory is named after its founder, Ralph Nelson Elliott, who observed that the stock market moves in waves. Elliott believed that these movements were not random and that they could be predicted by analyzing the natural human behavior of investors. Elliott Wave Theory provides a framework to study market behavior over time.

The Basics of Elliott Wave Theory

Elliott Wave Theory is based on five primary and three corrective waves, which are differentiated by their direction, timing, and magnitude. The primary waves are numbered from 1 to 5 and are known as motive waves, while the corrective waves are labeled as A, B, and C. The direction of the waves is determined by the price trend, with upward-moving waves being labeled as impulsive, while downward-moving waves are known as corrective.

Motive Waves

The motive waves are the primary directional movements in Elliott Wave Theory and represent the forces of investor psychology that drive trends in the market. These waves typically move in the direction of the underlying trend and are composed of five sub-waves – each sub-wave consisting of three waves, labeled as 1, 3, and 5. The 1, 3, and 5 waves are impulsive waves and move in the direction of the primary trend, while the 2 and 4 waves are corrective waves, which wind against the primary trend.

Corrective Waves

The corrective waves represent the opposite forces to the motive waves and aim to correct price movements back to the primary trend. These corrective waves can come in many forms. Some of the most common corrective patterns are zigzags (a-b-c), flats (3-3-5), and triangles (a-b-c-d-e). The A, B, and C waves of corrective patterns may consist of one or more sub-waves and can occur in any trend direction.