(Author's note: This article was originally published in May 2012.)
It is important to note that Elliott Wave Theory was derived from back-testing. Back in the 1930’s, R.N. Elliott studied decades of charts at various time frames, and discovered that there were certain patterns which repeated across all time frames. These patterns were of a fractal nature; in other words, the patterns on the one-minute chart join together to make up identical larger patterns on the hourly charts, which in turn make up identical larger patterns on the daily charts – and so on. He developed Elliott Wave Theory as an attempt to quantify and explain these patterns.
In the next chapter, we’ll examine the underlying patterns that form the basis of Elliott Wave Theory.
Part II can be found here.