Introduction
During an illness in the mid-1930s, Ralph Nelson Elliott discovered the correlation between human emotion and trend patterns contained within price charts.
Elliott discovered different patterns that repeated themselves in form but not necessarily in size or length of time; these patterns could always be subdivided into smaller waves within the framework of certain rules. He called this phenomenon the “wave principle.”
There are two basic waves in Elliott wave theory: a five-wave impulse pattern in the direction of the main trend and a three-wave correction pattern against the main trend.
In a later stage, Elliott used Fibonacci numbers together with the waves to predict target prices.
The Elliott wave principle gained wide attention in the 20th century during the 70s thanks Frost and Prechter, who published the legendary book, Elliott Wave Principle: Key to Stock Market Profits, 1978. During the economic crisis of the seventies, this book forecasted the big bull market of the eighties.
Today, Elliott wave theory is more widely used thanks to computer program applications for automatic wave recognition.
