Elliott waves or the Elliott wave principle is a hot topic in forex and financial markets in general. It has its disciples, who promote it as the only system you’ll ever need, and it has its sceptics, who just don’t buy into all the expansive claims…
Its real – you can see these patterns on a candlestick chart, no problem there – but whether you want or need to go along with all the psychological explanations attached is an open question.

Elliot waves actually have been a hot topic since the 1920’s, when one Ralph Nelson Elliott developed and promoted the theory – basically that market prices develop in time according to a specific pattern,

In the dominant trend, waves 1, 3, & 5 are motive or sometimes impulsive waves. Waves 2 & 4 are corrective waves.
Motive waves = with the trend,
Corrective waves = against the trend.

If the dominant trend is downwards, the pattern reverses – five waves down and three up, exactly the same, only upsidedown.

The timescale is not critical – it’s possible to observe Elliott wave patterns at the 5-minute level, or on monthly charts – on the very grand scale, it’s claimed that price movements across decades and even across centuries can be described using Elliott wave supercycles.

Elliott wave psychology
This would apply to a bullish wave, where the first, dominant trend is up – again, if a bearish Elliott wave, everything reversed…

Wave 1 - The price begins to rise – caused by a relatively small number of buyers deciding the price is (relatively) cheap.

Wave 2 – These original buyers begin to drop out – they now consider the price overvalued, overbought and have decided to take their profits – the price begins to fall, but won’t reach the level it started at before wave 3….

Wave 3 – Often, the longest and strongest wave – a wider circle of buyers have noticed the previous price rise and want a piece of the action. The price begins to rise again and pushes through the previous level to a new high.

Wave 4 – The price has overreached itself again and there’s more profit-taking and a pause for breath…

Wave 5 - Everybody has climbed aboard for the ride – and it’s starting to get a bit silly. The price reaches its absolute peak and there’s only one way to go from there.

The correction – the inevitable correction – waves a, b and c
The price is too high, the market is definitely overbought. Sellers enter the market in force and begin to dominate. The price is forced down, again subject to the opposing forces of selling short and profit-taking.

Conclusion
In that the forces and principles described are the same across any timescales, Elliott wave structures can be considered fractal patterns.
A fractal = a geometric shape that can be divided into parts, each of which is a reduced copy of the whole – self-similarity.
Fibonacci theory is also used to predict the levels at which the waves will start and stop.

This is where Elliott wave theory starts to be attached to vaguer ideas about human group psychology and even, at times, human collective consciousness. There’s a whole industry out there based on wave patterns, harmonic patterns and ‘natural’ reoccurring patterns – whether you want to check this out is up to you, but bear in mind that this is also where the snake-oil salespersons, with their 100% proven, secret magic systems start to make their appearance…

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