Tackling the Elliott Wave Theory

The Elliott Wave theory is a term that's often thrown around by forex brokers and by many other people involved in the forex market. The seemingly innocuous name actually refers to an idea which is a fundamental concept in foreign exchange or, for that matter, any other market. However, because many writers and professionals will assume that you already know all about the Elliot Wave theory, they don't bother telling you what it is exactly.

The Elliot Wave theory was given by Ralph Nelson Elliott, who gave the idea his name, in the 1930's. What Elliott basically said was that the market, foreign exchange or otherwise, moves in a cyclic and therefore predictable pattern. It was a revolutionary idea in Elliott's day because traders believed that the market moved randomly and without any predictable pattern.

Elliott's primary argument for his idea was that people - the forex traders for the case of foreign exchange - act, buy and sell in a predictable pattern because of certain behavioral instincts. And because people in the forms of buyers and sellers are the ones who make the markets move, the market itself becomes predictable. Elliott claimed that the general buying and selling activity relies on what's called mass psychology, or the prevalent mindset in a population. The herding or the crowding instinct kicks in and before you know it, enough people have purchased or sold to move the market significantly.

The concept was called the Elliott Wave theory not only because Elliott was the one who proposed it, but also because he split up any market movement into five distinct waves. Each wave is a phase in a particular market movement with its own position before one phase and after another. Knowing about each of those phases is a critical thing for any practitioner of the Elliott Wave theory because the waves basically dictate the best time for certain actions.

True, the Elliott Wave theory isn't perfect; that's why it remains a theory to this day and age. However, there has to be something for Elliott's advice because it's based on sound, sensible reasoning and a good knowledge of human nature. Many have also attributed their success to faithfully following the Elliott Wave theory by waiting for what was prescribed as the right moment and then acting accordingly. The facts in its favor and the testimonials singing its praises might not make the Elliott Wave theory itself hard fact, but it certainly turns it into an idea that you can't ignore.