Elliott Wave Theory
Elliott Wave Theory was identified and penned by Ralph Nelson Elliott in the 1920s. He recognized most markets moved in waves. Understanding where the market has been, is and will go would be beneficial for investing. He recognized a five wave pattern is followed by a three wave pattern in the opposite direction.
The five waves are often referred to as impulse waves and they are identified by numbers 1 through 5. The three waves are referred to as corrective waves and they are signaled with the letters A through C and sometimes A through E. These five and three wave structures are depicted below.
Once the basic wave structure is recognized, analysts can identify sub-waves inside of each wave in the image above. The image below depicts sub-waves inside of the initial displayed wave.
This process repeats from a large scale of data to a small scale. Analysts can begin with a chart of market data with the time interval set to one year. This would be represented by the orange line in the image below. Another examination of the same data with a time interval set to one month would reveal internal waves to the orange wave. These waves are purple in the image below. Further examination of the same data with a time interval set to one week would reveal internal waves to the purple wave. These waves are green below. This process can repeat until the time interval of data is set to the smallest allowed, typically one minute.
Each wave and following subsets are identified with different names and alphanumeric identifiers. As mentioned above, the impulse waves will always be identified with numbers 1-5. The font of the number varies between upper- and lowercase Roman and Arabic numerals. The corrective waves identifiers vary between upper- and lowercase Arabic letters.
The best chart we have found and use as a reference is below. It details the name of the waves, the styling of the wave identifiers, and the typical timeframe for wave (1-5) completion.
Identifying waves is only part of the success that makes wave analysts. Each analyst most likely uses additional signals, indicators, calculations and data. One of the simplest and best books on the subject is written by Bennett A. McDowell and can be found here.