Elliott Wave theory is considered as one of the best theory to forecast trends in movement of price. It was introduced in 1920’s by Ralph Nelson Elliott. He studied the repetitive cycle pattern and came to the conclusion that this pattern resulted because of the psychology of the people. Based on these wave patterns he made stock market predictions.
According to this theory, there is an impulsive wave that goes along with the main trend. These are five in numbers. Whenever there is an increase in price, it is corrected by what we call corrective or correction wave. This theory states that the five impulsive waves are followed by three corrective waves in order to correct the price rise; this is called a 5-3 move. Thus, it is concluded that a complete Elliott wave comprises of eight waves spanning over two phases.
In short, Elliott waves are three or five wave series of decline or advances that define a trend. Since these are based on psychology of the people thus, they have more reliability as compared to some other methods and that is why they are used in some important indices like Nasdaq Composite Index and S&P 500 Index etc.
Even though many future traders, forex traders and stock brokers are aware of this method of analysis and its reliability, still they do not go for it because they often find it difficult to understand and to integrate it into their technical analysis. However, it is not as difficult as some people perceive. It does requires some time and effort on your part, but the results that you will get after learning Elliott wave analysis will be satisfying. You just have to learn few guidelines and rules and you will be all set to use this powerful statistical tool.