Elliott Wave Theory, developed by R. N. Elliott, asserts that the crowd behaviour moves in distinct cycles of mainly greed and fear, which consists of an inherent order of a basic 5 wave impulse sequence and 3 wave corrective sequences. These two sequences sit at the very heart of the theory though much more advanced and complex applications are required before an application of the theory can be even thought about. The basic theory states that a 5 wave impulsive move may be followed by a 3 wave corrective move before the next set of 5 wave up move resumes the larger trend.
Advantages And Limitations of Elliot Wave Theory
The main advantage of this theory comes from the fact that it is probably the only technical theory providing a perspective to the price action, which may help a trader to ascertain the true trend of the stock at that moment. It helps to fix targets or minimum expectations in different time frames, with clear invalidation levels. A proper application of the theory may merge with the larger economical cycles in a seamless manner, providing greater clarity. The major limitation of the theory emerges from the very subjective nature of it, evident from the different counts by different Elliotists.