In the 1930’s R. N.
Elliott discovered that the stock market moves in certain patterns. He isolated
and described these different patterns and called the theory “the Wave
Principle”.
Progress unfolds in five waves
He noticed that the
market’s progression unfolds in waves. More precisely, progress ultimately takes
the form of five waves. Three of them, waves 1, 3, and 5, ensure the direction
of the movement. They are separated by waves 2 and 4 which point to the other
direction.
 |
| Chart 1.1 - Five-Wave-Pattern |
Two modes: motive and corrective
There are two modes of
waves: motive and corrective. Motive waves point to the direction of the bigger
trend and are five-wave patterns. Corrective waves are countertrend and consist
of three waves.
While the components (subwaves) of motive waves are numbered, the subwaves of correctives are lettered.
A cycle consists of eight waves
A complete cycle
consists of one motive and one corrective pattern. This results in eight waves
in total.
 |
| Chart 1.2 - Cycle |
Once one cycle is
completed another will follow which is then followed by another five-wave pattern. This creates a five-wave structure of one degree larger than in chart 1.2. This five-wave pattern is then followed by a three-wave correction of the same degree. The result is a cycle of one larger degree:
 |
| Chart 1.3 - Cycle of one larger degree |
This is the most important
chart in this tutorial so it’s crucial that you understand it. Chart 1.3 is
actually just a bigger copy of chart 1.2.
Each subwave of [1] (= circle 1) ((1),
(2), (3), (4), (5)) consists of five waves (1, 2, 3, 4, 5) which themselves consist
of five waves and so on... Imagine you could zoom in endlessly and always get the
same picture.
 |
| Chart 1.4 - Chart 1.3 zoomed in = Chart 1.2 |
Additionally, if you
have a look at wave (A) in chart 1.3. you can see that it consists of five waves and points
downward and not upward as we’ve always seen it so far. What may look wrong at the first glance is actually correct:
Motive waves don’t
always point upward and corrective waves downward. The absolute direction doesn’t
define the mode, the relative direction does. Motive waves trend in the same
direction as the wave of one larger degree and corrective waves trend in the
opposite direction.
In above example wave [2]
is the wave of one larger degree (relative to wave (A)) and points downward. Hence wave (A) is motive and
consists of five waves because it points downward as well.
 |
| Chart 1.5 - Cycle of one larger degree relative to Chart 1.3 |
Notation
As you've probably already noticed, I used different ways to label a wave one. Once I used a simple 1, another time I added brackets, square brackets, and in the last chart I even used Roman numerals. This isn't by chance.
So that Elliott wave practitioners understand each other they agreed on the following notation:
So that Elliott wave practitioners understand each other they agreed on the following notation:
 |
| Chart 1.6 - Notation (Circles are often replaced by square brackets for practical reasons) |
I suggest you to use this notation as well. If you tell a friend that the Dow Jones completed wave 3 of 5 of B of 3 he most likely doesn't know what you're talking about. If you tell him that the Dow Jones completed Minor 3 of Intermediate (5) of Primary [B] of Cycle III though, then he probably still doesn't know what you're talking about but most likely because he doesn't know Elliott waves.
For reasons of simplification I won't use above notation in this tutorial so you can skip it until the end of the tutorial. To distinguish between the waves of different degrees I'm going to use different font sizes.
Key notes
- Motives consist of 5 waves and point towards the direction of the wave of one larger degree
- Correctives consist of 3 waves and trend in the opposite direction of the wave of one larger degree
- The structure always repeats itself (Zoom in/out, chart 1.4)
In the next chapter
you’ll learn the variations of motive waves.
