Elliott Wave Theory: the complete foundation

What the theory says

In the 1930s Ralph Nelson Elliott noticed that price does not move at random. Crowds swing between optimism and pessimism in a repeating rhythm, and that rhythm leaves a shape on the chart. A trend advances in five waves and corrects in three. Read the shape and you know which phase the market is likely in and what usually comes next.

Motive and corrective waves

Waves 1, 3 and 5 move with the trend and are called motive waves. Waves 2 and 4 move against it. After the five-wave advance completes, a three-wave correction labelled A, B and C retraces part of the move. The same logic works in a downtrend, upside down.

Waves are fractal

Every wave is built from smaller waves of the same pattern. A wave (3) on the H4 chart contains a full five-wave impulse on H1, and each of those contains five more on M15. This is why Eightwaves analyses move top-down: the weekly count sets the direction, and each lower timeframe refines the entry. Our labels follow one convention: (1) for H4 and daily, 1 for H1, (i) for M15 and i for M5.

The three rules that never break

Wave 2 never retraces beyond the start of wave 1. Wave 3 is never the shortest of waves 1, 3 and 5. Wave 4 never enters the price territory of wave 1, except inside a diagonal. Break any one of these and the count is wrong, no matter how good it looks. That price becomes our invalidation level.

Guidelines that sharpen the count

Unlike rules, guidelines describe what usually happens. Waves 2 and 4 tend to alternate: if one is sharp, the other is often sideways. One of the motive waves, most often wave 3, usually extends. When wave 3 extends, waves 1 and 5 tend toward equal length. Wave 4 often ends near the fourth wave of one lower degree.

Fibonacci gives the targets

Wave relationships cluster around Fibonacci ratios. Wave 2 commonly retraces 50% to 61.8% of wave 1. Wave 3 often reaches 1.618 times wave 1. Wave 4 tends to retrace 23.6% to 38.2% of wave 3. These ratios turn a count into concrete entry zones and targets.