Back in the old school days of the 1920-30s, there was this mad genius and professional accountant named Ralph Nelson Elliott.
Elliot analyzed close to 75 years’ worth of stock data.
He discovered that stock markets thought to behave in a somewhat chaotic manner, actually didn’t.
When he hit 66 years old, he finally gathered enough evidence (and confidence) to share his discovery with the world.
He published his theory in the book entitled The Wave Principle.
What is the Elliott Wave?
According to him, the market traded in repetitive cycles.
He pointed out were the emotions of investors were caused by outside influences (ahem, CNBC, Bloomberg, WSB)
These were the predominant psychology of the masses at the time.
Elliott explained that the upward and downward swings in price caused by collective psychology always showed up in the same repetitive patterns.
He called these upward and downward swings “waves”.
He believes that if you can correctly identify the repeating patterns in prices, you can predict where the price will go (or not go) next.
This is what makes Elliott Waves so appealing to traders.
It gives them a way to identify precise points where the price is most likely to reverse.
In other words, Elliott came up with a system that enables traders to catch tops and bottoms.
So, amidst all the chaos in prices, Elliott found order. Awesome, huh?
Of course, like all mad geniuses, he needed to claim this observation and so he came up with a super original name: The Elliott Wave Theory.
But before we delve into the Elliott waves, you need to first understand what fractals are.