Crypto glossary
Elliott wave theory
Elliott wave theory holds that markets move in repeating wave patterns, five waves with the trend and three against it, reflecting crowd psychology.
Accountant Ralph Nelson Elliott proposed the theory in the 1930s after studying stock market data. In its basic form, a trend unfolds in five waves, labelled 1 to 5, in which waves 1, 3 and 5 move with the trend and 2 and 4 are pullbacks. A three-wave correction, labelled A, B and C, follows. Each wave is made of smaller waves of the same structure, so the pattern repeats across timeframes.
Wave counters apply rules, such as wave 3 never being the shortest impulse wave, and use Fibonacci ratios to project the length of waves. In crypto, Elliott wave analysis is common on bitcoin's long-term charts, where analysts publish counts that place the market in a given wave of a multi-year cycle.
The method's main weakness is subjectivity. Experienced practitioners often disagree on the count, and counts are frequently revised after the fact so they always fit. That flexibility makes the theory hard to test and its forecasts hard to hold accountable.
Example
An analyst labels bitcoin's rally from a cycle low as waves 1 through 3 and argues that a pullback to a Fibonacci level is wave 4. A move to new highs would complete wave 5.