The Elliott Wave Principle, named for its discoverer, Ralph Nelson Elliott, quite simply measures how groups of people behave. One of the easiest places to see this phenomenon at work is in the financial markets, where changing investor psychology is reflected in the form of price movements. While it had been thought that traders behaved in a somewhat chaotic manner, Elliott discovered they actually traded in repetitive cycles, which, it turned out, were the emotions of investors as a result of outside influences. The up and down swings of the mass psychology always showed up in the same repetitive patterns, which were then divided into patterns he named "waves". His theory went on to reveal that if you can identify repeating patterns in prices, and figure out where those repeating patterns occur, then you can predict where we are going in the future.
What does it measure?
Essentially, Elliott wave analysis measures psychology. When people are optimistic about the future of a given issue, they bid the price up. For hundreds of years, investors have noticed that events external to the market seem to have no consistent effect on the market’s progress. The same news that seems to drive the market up today, is just as likely to drive it down tomorrow. The only reasonable conclusion is that the markets simply do not react consistently to outside events. And when one studies historical charts, they show that the markets continuously unfold in waves.
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