Economics: Elliot wave theory

The Elliott Wave Theory is a principle in economics that attempts to predict future prices and trends. The theory says that the trends form a pattern that, when graphed form waves, called Elliott waves. The principle is that the collective investor opinion shifts from optimism and pessimism and back, creating the waves. Two types of Elliott waves exist; Motive and Corrective waves. Motive waves are divided into a smaller five wave structure and Corrective into smaller three wave structures. There are nine degrees to a wave ranging from Grand Supercycle (multi-century) to Intermediate (weeks to months) to Subminuette (minutes).

The theory is named for Ralph Nelson Elliott who proposed his wave principle in the 1930’s. He based his theory on his belief that since humans like to have a routine or rhythm their spending habits, activities and choices would also form a pattern or rhythm. Elliott published his work in a number of places including; The Wave Principle (1938), articles in Financial World magazine (1939) and Natures Laws – The Secret of the Universe (1946).

The way practitioners of the theory study the market is they spend a lot of time studying price charts. By examining the developing price movement they can determine the wave structures giving them the ability to predict the next move in the prices.

Critics have a number of problems with the wave theory arguing that it contradicts the efficient marketing hypothesis, which says that future market trends cannot be predicted from trends in the market, such as averages and volume. And since it is not possible for practitioners to say when a wave begins or ends, the theory is too vague to be of practical use.