Elliott Waves and Fibonacci Ratios

5.1Five Impulse Waves and Three Corrective Waves

Elliott wave theory was put forward in the 1930s by Ralph Nelson Elliott, an American accountant. Elliott believed that price movements follow recurring patterns driven by alternating optimism and pessimism among participants, and organised them into a cycle of five waves in the direction of the trend (the impulse) and three waves that correct it.

In a rising market, waves 1, 3 and 5 move up and waves 2 and 4 pull back, forming five waves of advance, followed by a correction in three waves, A, B and C. In the diagram, the price rises from 0 to wave 5 with higher highs and higher lows, then falls in three waves, A, B and C.

The wave structure is said to be fractal, or nested: a large wave 1 contains five smaller waves, and a large wave A contains smaller waves too. One wave on a weekly chart may break into five waves on a daily chart, so the unit you count changes with the timeframe.

• Impulse: five waves in the direction of the trend (1–5)
• Correction: three waves that correct the impulse (A, B, C)
• Waves are nested, so the unit you count depends on the timeframe