What exactly are Elliott Waves and how are the useful in technical analysis for traders to take positions?

A study of repeating price patterns with Fibonacci analysis yields another branch of technical analysis known as Elliott Waves. This is named after its founder Ralph Nelson Elliott. Interestingly, Elliott analyzed 75 years’ worth of stock data before formulating and compiling his theories in a book entitled The Wave Principle. Elliott wave theory basically discusses how price movements are not completely random and that markets traded in repeating cycles. Elliott Waves are about very long term cycles which could range from a few weeks to months and even multiple numbers of years. That is the benefit of perspective that you get when you look back at empirical data of 75 years into the past.

Elliott noted that the upward or downward swings in price action are a result of a collective market psychology, central to which are emotions of traders. This is in a way extension to the original theory of technical analysis that the sustainable patterns in technical analysis are the result of human psychology. That is because humans are the same and their thinking and reaction to stimuli is also the same. In his book, he outlined ways in which traders can catch trends at ideal prices as he detailed methods of catching market corrections and continuations. One of the most basic that Elliott has discussed in his book is called the 5-3 pattern. In the 5-3 pattern, the first five waves are the impulse waves and the last three waves are called the corrective waves. They have been observed to be extremely accurate when it comes to taking a long term view based on charts. Most fundamental investors also use the power of Elliott Wave theory to ratify their long term macro view on various asset classes where such a rich history of asset price is readily available.