Ralph Nelson Elliott discovered in the 1930s that financial markets do not move in a chaotic manner, but rather in repetitive cycles or "waves." These waves are a reflection of collective human psychology—alternating between optimism and pessimism.
The core Psychology of the Market
Markets are driven by social mood. Elliott Wave Theory quantifies this mood into patterns. When people are euphoric, we see the 5-wave impulse. When they are fearful, we see the 3-wave correction.
The 5-Wave Motive Pattern
The Anatomy of an Impulse
- Wave 1: Initial move, often unrecognized.
- Wave 2: Sharp retracement, often testing the start of Wave 1.
- Wave 3: The strongest expansion; where the most money is made.
- Wave 4: Complex correction; often sideways.
- Wave 5: Final exhaustion move; retail traders enter here while big money exits.
Corrective Waves: The ABC Pattern
After a 5-wave impulse, the market must correct. This usually happens in a 3-wave "ABC" pattern. Understanding this sequence allows professional traders to wait for the completion of a correction before entering for the next major impulse wave.
Golden Ratios: Fibonacci and Elliott
Elliott waves often adhere to Fibonacci proportions. For example, Wave 2 typically retraces 61.8% of Wave 1. Wave 3 is often 161.8% of Wave 1's length. This mathematical precision is what makes forecasting possible.
Conclusion
AURA's engine uses fractal geometry to analyze these waves across multiple timeframes simultaneously, providing a "top-down" perspective that keeps you on the right side of the market.