The Elliott Wave Theory in technical analysis describes price movements in the financial market. Developed by Ralph Nelson Elliott, it observes recurring fractal wave patterns identified in stock price movements and consumer behavior. Investors who profit from a market trend are described as riding a wave

1. 21COMBT361: INVESTMENT
MANAGEMENT
Dr. NEERUPA CHAUHAN
Asst. Professor
Kristu Jayanti College, Autonomous
(Reaccredited A++ Grade by NAAC with CGPA 3.78/4)
Bengaluru – 560077, India

3. What Is the Elliott Wave Theory?
• The Elliott Wave Theory in technical analysis
describes price movements in the financial market.
Developed by Ralph Nelson Elliott, it observes
recurring fractal wave patterns identified in stock
price movements and consumer behavior. Investors
who profit from a market trend are described as riding
a wave

4. • The Elliott Wave theory is a technical analysis of price
patterns related to changes in investor sentiment and
psychology.
• The theory identifies impulse waves that establish a
pattern and corrective waves that oppose the larger
trend.
• Each set of waves is within another set of waves that
adhere to the same impulse or corrective pattern,

5. Understanding the Elliott Wave Theory
• Elliott defined rules to identify, predict, and capitalize on wave
patterns in books, articles, and letters summarized in R.N. Elliott's
Masterworks, published in 1994. Elliott Wave International is the
largest independent financial analysis and market forecasting firm
whose market analysis and forecasting are based on Elliott’s
model.
• His patterns do not provide any certainty about future price

6. How Elliott Waves Work
• Some technical analysts profit from wave patterns in the stock market using the Elliott Wave
Theory.
• The theory assumes that stock price movements can be predicted because they move in
repeating up-and-down patterns called waves created by investor psychology or sentiment.
• The theory is subjective and identifies two different types of waves: motive or impulse waves,
and corrective waves.
• Wave analysis does not equate to a template to follow instructions.
• Wave analysis offers insights into trend dynamics and helps investors understand price
movements.

7. • Impulse and corrective waves are nested in a self-similar fractal to
create larger patterns.
• For example, a one-year chart may be in the midst of a corrective
wave, but a 30-day chart may show a developing impulse wave.
• A trader with this Elliott wave interpretation may have a long-term
bearish outlook with a short-term bullish outlook.

8. Impulse Waves
• Impulse waves consist of five sub-waves that make net movement
in the same direction as the trend of the next-largest degree.
• This pattern is the most common motive wave and the easiest to
spot in a market.
• It consists of five sub-waves, three of which are motive waves.
Two are corrective waves.

10. • Wave 2 can’t retrace more than the beginning of Wave 1
• Wave 3 can not be the shortest wave of the three impulse
waves, 1, 3, and 5
• Wave 4 does not overlap with the price territory of Wave 1
• Wave 5 needs to end with momentum divergence
• If one rule is violated, the structure is not an impulse
wave. The trader would need to re-label the suspected
impulse wave.

11. Corrective Waves
• Corrective waves, called diagonal waves, consist of three,
or a combination of three sub-waves that make net
movement in the direction opposite to the trend of the
next-largest degree. Its goal is to move the market in the
direction of the trend.

12. • The corrective wave consists of 5 sub-waves.
• The diagonal looks like either an expanding or contracting
wedge.
• The sub-waves of the diagonal may not have a count of five,
depending on what type of diagonal is being observed.
• Each sub-wave of the diagonal never fully retraces the previous
sub-wave, and sub-wave 3 of the diagonal may not be the
shortest wave.

13. Elliot Wave Theory vs. Other Indicators
• Elliott recognized that the Fibonacci sequence denotes
the number of waves in impulses and corrections.
• Wave relationships in price and time also commonly
exhibit Fibonacci ratios, such as 38% and 62%.
• For example, a corrective wave may have a retrace of
38% of the preceding impulse.

15. • Other analysts have developed indicators inspired by the Elliott
Wave principle, including the Elliott Wave Oscillator Chart.
• The oscillator provides a computerized method of predicting
future price direction based on the difference between a five-
period and a 34-period moving average.
• Elliott Wave International’s artificial intelligence system,
EWAVES, applies all Elliott wave rules and guidelines to data to
generate automated Elliott wave analysis.

17. 21COMBT361: INVESTMENT
MANAGEMENT
Dr. NEERUPA CHAUHAN
Asst. Professor
Kristu Jayanti College, Autonomous
(Reaccredited A++ Grade by NAAC with CGPA 3.78/4)
Bengaluru – 560077, India

18. Technical indicators
• Technical indicators are heuristic or mathematical calculations
based on the price, volume, or open interest of a security or
contract used by traders who follow technical analysis.
• Technical analysts or chartists look for technical indicators in
historical asset price data to judge entry and exit points for trades.
• There are several technical indicators that fall broadly into two
main categories: overlays and oscillators.

19. How Technical Indicators Work
• Technical analysis is a trading discipline employed to evaluate investments
and identify trading opportunities by analyzing statistical trends gathered
from trading activity, such as price movement and volume.
• Unlike fundamental analysts, who attempt to evaluate a security’s intrinsic
value based on financial or economic data, technical analysts focus on
patterns of price movements, trading signals, and various other analytical
charting tools to evaluate a security’s strength or weakness.

20. Types of Indicators
• There are two basic types of technical indicators:
• Overlays: Technical indicators that use the same scale as prices
are plotted over the top of the prices on a stock chart.
– Examples include moving averages and Bollinger Bands®.
• Oscillators: Technical indicators that oscillate between a local
minimum and maximum are plotted above or below a price chart.
– Examples include the stochastic oscillator, MACD, or RSI.

22. What Is an Oscillator?
• An oscillator is a technical analysis tool that constructs high and low bands between two
extreme values and then builds a trend indicator that fluctuates within these bounds.
• Traders use the trend indicator to discover short-term overbought or oversold conditions.
• When the value of the oscillator approaches the upper extreme value, technical analysts
interpret that information to mean that the asset is overbought, and as it approaches the
lower extreme, technicians consider the asset to be oversold

23. How Oscillators Work
• Oscillators are typically used in conjunction with other technical analysis indicators to make trading
decisions. Analysts find oscillators most advantageous when they cannot find a clear trend in a
company's stock price easily, for example when a stock trades horizontally or sideways. The most
common oscillators are the:
– Stochastic Oscillator (A stochastic oscillator is a momentum indicator comparing a particular closing price of a
security to a range of its prices over a certain period of time.)
– Relative Strength (RSI)
• The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of
a security's recent price changes to evaluate overvalued or undervalued conditions in the price of that security.
– Rate of Change (ROC)
• The Price Rate of Change (ROC) is a momentum-based technical indicator that measures the percentage change in price
between the current price and the price a certain number of periods ago.
– Money Flow (MFI)
• The Money Flow Index (MFI) is a technical oscillator that uses price and volume data for identifying overbought or oversold
signals in an asset.

24. • In technical analysis, investors find oscillators to be one
of the most important technical tools to understand, but
there are also other technical tools that analysts find
helpful in enhancing their trading, such as chart reading
skills and technical indicators.