How Does Elliott Wave Analysis Work?

Elliott wave analysis is based upon the Elliott Wave Principle, which states that investor psychology is the real engine behind the stock markets.

Robert Prechter, Elliott Wave International's founder and president, explains: “The Wave Principle is a catalog of the ways that the crowd goes from the extreme point of pessimism at the bottom to the extreme point of optimism at the top. It is a description of the steps human beings go through when they are part of the investment crowd, in order to change their psychological orientation from bullish to bearish. Since people don’t change much, the path they follow in moving from extreme pessimism to extreme optimism and back again tends to be the same over and over, regardless of news and extraneous events.”

Therefore, Elliott wave analysis involves deciphering the psychological orientation of the investment crowd through the wave patterns evolving in various stock markets. And since we here at Elliott Wave International use Elliott wave analysis on all of the world’s major stock indexes, we're confident we can gauge how investor psychology is trending.

In order to utilize Elliott wave analysis, you must become familiar with the Elliott Wave Principle. The Elliott Wave Principle enables you to properly decipher the wave patterns unfolding in each stock market and then make predictions on which wave patterns are most likely to occur next — this is the basis of Elliott wave analysis.

Each Elliott wave structure carries with it unique personality traits and is followed by another specific and unique structure. Studying these patterns eventually allows analysts to be able to predict both what may occur next, and — possibly even more importantly — what won’t happen next.

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