Forex 104Lesson 5

Elliott Wave Theory

Ralph Nelson Elliott was born in Marysville, Kansas on July 28th 1871. During the

greater part of his life he worked as an accountant for several railroad companies in Central America and Mexico. Elliott was forced to retire early, due to debilitating

intestinal illness he caught during his time in Central America.

In order to keep his mind occupied, Elliott began studying the American stock market. Somewhere in the mid 1930s he discovered, that the price action of stocks is not random or

chaotic, but patterned. The Market is governed by natural laws, contrary to the

widely-accepted opinion that news and events are the driving force behind price trends.

In 1946 Elliott published a book called “Nature’s Law – The Secret of the Universe”, where

he explained everything he had discovered. In this book he stressed out, that the Wave

Principle is applicable not only to the markets, but in many other fields of life. Elliott

died on January 15th 1948, but his legacy is still alive, thanks to people like Charles

Collins, A.J.Frost and Robert Precher Jr.

Basic of The Elliott Wave Theory

Elliott Wave 5-3 cycle

By studying 75 years of past market data, Elliott noticed that prices make five swings in the

direction of the larger trend and only three swings against it. Those swings he called

“waves”. If the trend is moving up, there are five waves in the upward direction and three

downwards. If the trend is moving south, the Elliott Wave cycle is upside down – five down, three up.

Furthermore, he found out that this 5-3 Elliott Wave cycle

can be found on all degrees of trend. It stays the same, regardless of whether we are looking at a yearly or a five-minute chart.