Elliot Wave Theory
It’s no secret most crypto analysts adhere strongly to Elliott Wave Theory. Far from being a one-stop principle that explains everything happening in crypto trading, it does help us tackle the cyclical nature of markets.
Ralph Elliot developed the The Elliot Wave Theory back in the 1930s and describe the theory as a belief that price action plays out over observable patterns that repeat time and time again. In his theory, there are two types of waves:
- Impulse Waves
- Corrective Waves
Impulse waves are moves in the direction of the predominant trend, whereas corrective waves move against the trend. You can easily think of this by imagining BTC having a strong months-long uptrend, followed by a downward correction. The waves in-line with the uptrend are impulse waves, and those moving against it and pushing the price down are corrective ones.
It’s wrong to think that impulse waves can only correspond to moves up. They are just about trends, regardless of whether which direction the market is heading. A correction can occur to the upside, shaking out a downward trend. In that case, a corrective wave up would still be properly considered a correction.
Impulse waves move in packs of five, meaning you’ll always get five on-trend impulse waves before being hit by three corrective waves. That gives you a total of eight waves in a given cycle before the next trend takes hold.
Although it describes market action, it’s also a pretty thoughtful piece of psychological work. Traders emotions move in similar cycles of highs and lows . No one stays positive about a trend forever, and neither do they stay negative. The data which drives a traders decisions and rationale shifts all the time, making it foolish to stick with any position dogmatically.
The cyclical nature between positive and negative/optimistic and pessimistic states of mind factors heavily into EW Theory’s own dynamic wave structure. Like the market, Elliott Waves never stand still. However, that doesn’t make them ideally suited to short time frame charts. Because Elliott Waves describe trends, they’re best applied to long time frames – especially if you’re just beginning to interpret the market with them.