The Elliot Graph was based on Chaos Theory, or Elliot Wave Theory, also known as Fractal Theory.
Elliot Wave Theory is a methodology that aims to map the cycles of an asset, in order to understand the dynamics of prices in the present, projecting future scenarios. The geometric pattern noticed by Ralph Nelson Elliot searches to find areas of trend reversal in order to anticipate the change in price direction. The zigzag with rising tops and bottoms (uptrend), followed by a bottom smaller than the last bottom, would technically present a trend reversal.
Wave 1 is identified when the market is down, and may represent a jump from the trend change. It is valid to state that during this wave, the well informed investors position themselves. The size of this wave is fundamental to know the size of the others.
Wave 2 happens when the market quickly reverses positions.
Wave 3 is the wave most sought after by those who follow Elliott Wave theory. It shows a quick rise and is where prices accelerate and volumes become larger.
Wave 4 is the most difficult to identify, because its depth and length are not very significant.
Wave 5 can be identified as a high with low volume.
Wave A is formed by a period of strong bearishness. Wave B, however, is characterized by a bullish period with weak volume, which is similar to wave 4.
Wave C presents as its main feature a strong decrease, showing that there is a new downward trend.
That is, rising tops and bottoms (1 through 5), characterizing an uptrend, followed by a bottom (c) below the last bottom (a), characterizing possible market reversal.
As each pattern is built in fractal format, the same drawing pattern can repeat itself at other times, in greater or lesser scale, being in greater or lesser periodicities.
To select this type of graph, click the clock icon in the graph window:
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