Inside Trade | Acquaintance with the emotional wave – Elliot Waves

Expansion – enthusiasm – euphoria – recession – depression; the emotional chain that dictates both traders and prices. Ralph Nelson Elliot, in his study of the stock market, discovered that the crowd behavior has a sequence and revolves in a cycle. It is made up of 5 waves, 3 of which are known as the impulse waves which is directed to the main trend and the remaining 3 are called corrective waves which are directed against the trend. After the main trend has fully developed, there are 3 waves that will develop to correct the price movement.

In the image above, the waves labeled with numbers 1,3,5 are the impulse waves while 2,4 are corrective waves. As a rule, the longer the impulse waves are the longer will be the corrective waves.
 Meanwhile, the waves labeled with letters are the ones that will correct the price movement.

The point of this analysis is that the price movement has a natural and cyclical flow. As traders, our only objective is to identify these waves and use it to our own advantage.