Elliot wave Theory was originally applied to the major stock market averages, particularly the Dow Jones Industrial Average. In its most basic form, the theory says that the stock market follows a repetitive rhythm of a five wave advance followed by a three wave decline. It builds on the concept of “swing objectives” by using Fibonacci ratio projections and percentage retracements.

The Elliot Wave Theory is comprised of wave forms, ratios, and time, in that order of importance. Pattern refers to the wave patterns that comprise the most important element of the theory. Ratio analysis is useful in determining retracement points and price objectives by measuring the relationships between the different waves. Finally, time relationships also exist and can be used to confirm the wave patterns and ratios, but are considered by some Elliotticians to be less reliable in market forecasting.

It is important to keep in mind that wave theory was originally meant to be applied to the stock market averages. It doesn’t work as well in individual common stocks. The theory works best in those commodity markets with the largest public following, such as gold. We should view Elliott Wave Theory as a partial answer to the puzzle of market forecasting.  Using it in conjuction with all of the other technicaal theories will increase its value and improve chance for success.