Elliott Wave Assumptions and Cycles
By: Lisa
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The Elliott Wave Principle is based on certain assumptions which over time have proven to be quite accurate, but not necessarily infallable. In previous lessons, we explained the basic Elliot Wave pattern and Impulse and Correction waves. There is a true art to Elliott Wave analysis, and its success is based on the following assumptions:
Assumptions of Elliott Wave Theory:
- The market is not efficient
- It is a true free market (i.e., prices are set by the consumer's beliefs).
- It provides consistent and standard metrics that can be measured.
- It is manipulated by a statistically significantly large group of people.
The interpretation of the Elliott Wave Theory is as follows:
Elliott Wave Theory is interpreted to hold a specific set of rules, or principles:
- Every action is followed by a reaction.
- There are five waves in the direction of the main trend followed by three corrective waves (a "5-3" move).
- A 5-3 move completes a cycle.
- This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
- The underlying 5-3 pattern remains constant, though the time span of each may vary.
Because Elliott Wave Theory is based on the concept that the markets move in cycles in a semi-predictable manner, it might help you to know what the various cycles are. Elliott proposed that much like the universe, certain patterns appear within patterns, and those may appear within other patterns. Basically, what this means is that there are cycles within cycles, within cycles.
Elliott Wave Theory Cycles
The Elliott Wave Theory has assigned a series of categories to the waves in order of the largest time frame to the smallest time frame. They are:
- Grand Supercycle
- Supercycle
- Cycle
- Primary
- Intermediate
- Minor
- Minute
- Minuette
- Sub-Minuette
Whereas a Grand Supercycle might be the chart of a security since 1932, spanning decades, a Sub-Minuette might be the price of that security on a 5-minute chart. The catagories are all based on identifyable degrees of waves, and waves within waves. Since this is a basic primer about Elliott Wave Theory, we won't get into details about the wave catagories. But you can find out much more information about them from the good people at Elliott Wave International.
In our next lesson, we will show you how to count the wave patterns. Keep learning and mastering Forex, right here at PipsAngels.com. See you soon!
