Hi Elliott Waver,

Wave analysis is simply the identification of patterns in market prices.

A motive wave is composed of five subwaves and moves in the same direction as the trend of the next larger size. A corrective wave is composed of three subwaves and moves against the trend of the next larger size.

As Figure 1 shows, these basic patterns build to form five- and three-wave structures of increasingly larger size (larger “degree,” as Elliott said).

In the above illustration, waves 1, 2, 3, 4 and 5 together complete a larger motive wave sequence, labeled wave (1). The structure of wave (1) tells us that the movement at the next larger degree of trend is also upward. It also warns us to expect a three-wave correction — in this case, a downtrend. That correction, wave (2), is followed by waves (3), (4) and (5) to complete a sequence of the next larger degree. And so on.

Regardless of size, each “wave one” peak leads to the same result — a “wave two” correction; and each “wave three” peak leads to a “wave four” correction.

That's just a snapshot of how the Wave Principle can help you understand and anticipate market price action.

To learn more about Elliott waves, check out our Educational Resources.

Sincerely,

Derek Bruce
Elliott Wave International