Elliott Wave Theory

In 1930s, Ralph Nelsons Elliott founded Elliott Wave Theory. He said that even in an uptrend, stock price will not go up everyday continuous. Instead, it will undergo a few corrections in its uptrend. An uptrend of a stock price should be like this.

 

There are 3 rules that need to be followed:

1 Wave 2 never retraces more than 100% of wave 1.

2 Wave 3 cannot be the shortest of the three impulse waves, namely waves 1, 3 and 5.

3 Wave 4 does not overlap with the price territory of wave 1, except in the rare case of a diagonal triangle.

Why the movement of stock price should act like this pattern. There is an explanation based on the characteristics of different investors.

There are 3 types of investors

1 long term investors : buy in when the price are cheap

2 technical analysts :  sell when the price reach resistance line and sell when price reach supportive line

3 retails : buy when price go up (greedy) and sell when price go down (panic)

At point 1, all 3 types investors will buy in..Because the price is a t low point(long term investors), just pass first resistance line(technical analyst) and price goes up (retails).

When the price reach point 2, (resistant line) technical analyst will sell out and cause the price to stop and retract.

At point 3, retails will sell out (price goes down)

At point 4, technical analysts(touch supportive line) and long term investors(price becomes cheap) will start to buy in. This will cause the price to stop falling and rebound.

At point 5, retails will start to buy in when seeing the price increase.

The buy and sell decision of each types of investors will cause the stock price to move. And the movement of price will cause another buy and sell decision of investors. This is so called the chain reaction.

Continue to Step 4: "Volume-Price Relationship"

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