Elliott Wave theory

Elliott Wave theory is a framework for reading price charts that views market moves as a repeating series of waves driven by shifts in collective investor psychology, rather than as a process that is purely random or driven purely by fundamentals. It was developed by accountant Ralph Nelson Elliott in the 1930s after he studied decades of stock market data and concluded that prices move in recognizable, repeating patterns rather than randomly.

The core structure is a move made up of five waves in the direction of the larger trend, three waves that advance and two smaller waves that pull back in between, followed by a corrective move made up of three waves against that trend. According to the theory, this sequence of eight waves then repeats at different scales, so a single wave in a larger pattern can itself be broken down into its own smaller sequences of five waves and three waves, nested inside one another across timeframes from minutes to decades.

Elliott Wave analysis is one of the more subjective corners of technical analysis, since identifying exactly where one wave ends and the next begins often depends heavily on the analyst's own interpretation, and two practitioners can reasonably label the same chart differently. Supporters argue it captures real patterns in crowd psychology, cycles of optimism, greed, and fear, that repeat because human behavior repeats, while critics argue its flexible rules make it easy to fit after the fact but difficult to use for reliable predictions in advance. It remains widely followed among technical analysts despite this ongoing debate.