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Essential Technical Analysis Tool for Predicting Market Trends: Elliott Wave Theory

2025-11-18 16:05:35 | 浏览 48

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What is Elliott Wave Theory?
Elliott Wave Theory, proposed by American accountant Ralph Nelson Elliott in the 1930s, claims that market prices do not fluctuate randomly but rather exhibit recurring wave structures. This theory is widely used in markets such as stocks, forex, futures, and cryptocurrencies, and is an important tool for traders to observe trends and predict market movements.

Wave Structure
A complete Elliott Wave cycle consists of 5 "Impulse Waves" and 3 "Corrective Waves":

Impulse Waves (Waves 1, 2, 3, 4, 5): Advancing with the trend, typically representing the main upward/downward phase of a major trend. Waves 1, 3, and 5 are trend waves, while waves 2 and 4 are corrective waves.

Corrective Waves (Waves A, B, C): Correcting against the trend, reflecting a shift in market sentiment from extremes to equilibrium.

For example, if the main price trend is upward, waves 1, 3, and 5 will rise, while waves 2 and 4 will correct; conversely, if the main trend is downward, it indicates a downward trend.


Practical Rules and Key Points
  • The third wave in a 5-wave pattern is usually the strongest or longest.
  • The second wave will not fall below the starting point of the first wave, and the fourth wave will not fall below the high point of the first wave.
  • Corrective wave patterns are diverse, including zigzags, flats, triangles, etc.
  • Each wave can be subdivided into smaller waves, applicable to different time periods.

How to apply it in trading?
Identifying wave structure: Determining which wave the market is currently in can help predict the direction of subsequent trends.

Combining with technical indicators
: Indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) can be used to strengthen wave reversal signals.

Risk management and entry strategies
: Using wave tops and bottoms as stop-loss and take-profit references can improve the success rate of trading.

Elliott Wave Theory decomposes market movements into regular wave structures, helping investors analyze sentiment and grasp key trends. Beginners only need to master the basic principle of "5 + 3" to gradually apply it to the technical analysis of various financial products.