A.J. Frost, Robert Prechter - Elliott Wave Theory.pdf

A CAPSULE SUMMARY OF THE WAVE PRINCIPLE
The Wave Principle is Ralph Nelson Elliott's discovery that social, or crowd, behavior trends
and reverses in recognizable patterns. Using stock market data as his main research tool,
Elliott isolated thirteen patterns of movement, or "waves," that recur in market price data. He
named, defined and illustrated those patterns. He then described how these structures link
together to form larger versions of those same patterns, how those in turn link to form
identical patterns of the next larger size, and so on. In a nutshell, then, the Wave Principle is a
catalog of price patterns and an explanation of where these forms are likely to occur in the
overall path of market development.
Pattern Analysis
Until a few years ago, the idea that market movements are patterned was highly controversial,
but recent scientific discoveries have established that pattern formation is a fundamental
characteristic plex systems, which include financial markets. Some such systems
undergo "punctuated growth," that is, periods of growth alternating with phases of non-
growth or decline, building fractally into similar patterns of increasing size. This is precisely
the type of pattern identified in market movements by . Elliott some sixty years ago.
The basic pattern Elliott described consists of impulsive waves (denoted by numbers) and
corrective waves (denoted by letters). An impulsive wave posed of five subwaves and
moves in the same direction as the trend of the next larger size. A corrective wave is
composed of three subwaves and moves against the trend of the next larger size. As Figure 1
shows, these basic patterns link to form five- and three-wave structures of increasingly larger
size (larger "degree" in Elliott terminology).
In Figure 1, the first small sequence is an impulsive wave ending at the peak labeled 1. This
pattern signals that the movement of one larger degree is also upward. It also si