The concepts of the Elliott Wave Theory were developed by Ralph Nelson Elliot in the 1930s. The main principle of the Wave Theory is that by Ralph Nelson Elliot's statement, market prices unfold in specific patterns (similarly to Dow Theory), which technical analysts now call Elliot waves. According to Elliot's view of the market, price movements are rhythmical and these movements can be predicted in rhythms, too. The explanation of price's rhythmical patterns, according to Elliot Theory, is the result of human nature, human activities and human's decisions, which are rhythmical as well.

The Elliot Wave theory reveals that pessimism and optimism of traders (bullish and bearish sentiment) swing backward and forward in natural sequence and these swings are reflected in specific wave patterns of price movement. Each price pattern (of the market) has specific indications that can be recognized and used to predict future price movements.

By its nature, the Elliot wave analysis could be considered to be a unique form of market analysis that is created by technical analysis and of behavioral economics with the purpose of defining extremes in traders' psychology - tops and bottoms in markets. According to the Elliot wave analysis, price patterns are the result of (human) socio-economic processes that repeat themselves in a constantly recurring series of similar waves of specific number and pattern.

The technical analysis of wave theory describes price movement as a series of either five or three waves. The dominant trend can be divided into five waves where the first, third and fifth waves are considered to be "motive" waves and can be subdivided into another five waves by themselves. The second and forth waves are considered to be "corrective" waves and can be subdivided into another three waves. "Motive" waves always move with the trend and "corrective" waves are corrective moves against a dominant trend. If dominant trend is bullish, this trend can be described by five waves up and three waves down. A dominant bearish trend can be described by five waves down and three waves up.

One of the main aspects of Elliot wave theory is the use of volume behavior as a key factor in recognizing momentum and investors' sentiment. Volume helps to understand why and how the waves develop. If, in the 1930s and 1970s, the volume of indexes was not available and the Elliot wave theory had certain implementation difficulties in relation to the entire market when the NYSE and AMEX exchanges were analyzed. It was easier with the Dow Jones Industrial Index (a small number of stocks), yet, the S&P 500 remained behind the scenes. Today, the volume of the S&P 500, DJI, NASDAQ 100, NYSE Composite and NASDAQ Composite indexes help to define sentiment and understand the nature of price waves.

In technical analysis, Fibonacci numbers are used to mathematically describe waves' structure.

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