The concepts of Elliotwave theory were developed by Ralph Nelson Elliot in the 1930s. The main principle of the Wave theory is that by Ralph Nelson Elliot statement market prices unfold in specific patterns (similarly to Dow Theory) which technical analysts now call Elliot waves. According to the Elliot's view on the market, price movements are rhythmical and these movements could be predicted in rhythms, too. The explanation of price's rhythmical patterns according to Elliot Theory is the result of the 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 back and forward in natural sequence and these swings are reflected in specific wave patterns of price movement. Each price pattern (regarding the position of the market) has specific indications that could be recognized and used to predict future price movements.

In its nature the Elliotwave analysis could be considered as unique way of market analysis that is formed by technical analysis and of behavioral economics with purpose to define extremes in trader's psychology, tops and bottoms in markets. According to the Elliotwave analysis price patterns are result of (human) socio-economic processes which repeat themselves in constantly recurring series of similar waves of specific number and pattern.

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

One of the main aspects of Elliotwave theory is using volume behavior as a key factor in recognizing momentum and investor's sentiment. Volume helps to understanding why and how the waves develop. If in the 1930s and 1970s volume of indexes was not available and Elliotwave theory had certain implementation difficulties in relation to the whole market when NYSE and AMEX exchanges were analyzed. It was easier with Dow Jones Industrial Index (small number of stock), yet, S&P 500 remained behind the scene. Nowadays, 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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