Ralph Nelson Elliott introduced the Elliott wave concept back in the 1930s. He proposed the idea that shifts in financial prices were a reflection of the prevailing sentiments of investors. This led to the conclusion that fluctuations in mass psychology led to repetitive fractal models, referred to as “waves,” which acted as indicators for anticipating forthcoming price actions.

Elliott distinguished between two main wave types - impulsive and corrective, stemming from his continuous observations. He observed that a typical movement typically initiates with an impulsive wave, aligning with the prevailing trend, succeeded by a corrective wave that counters the trend. Elliott theorized that a group of five waves typically formed a larger impulsive wave, which was followed by a three-wave corrective phase. Breaking it down further:

When observed independently, the initial impulsive move includes a sequence of five waves - three in support of the trend and two opposing it. The corrective move involves three waves - two against the trend and one in favor. The three-legged nature of the corrective wave can influence the assumptions made about highs and lows in trend perceptions: while conventional wisdom suggests that higher highs and higher lows indicate an upward trend, the Elliot Wave theory posits that a lower high and lower low could signify a short-term trend correction.

Despite this, a downtrend is not necessarily negated, but rather signifies a period of retracement that is more robust compared to previous corrections noted within the impulsive move.

Elliott categorized his waves, known as degrees, establishing that similar patterns are visible in both long- and short-term charts. These categories include:
• Grand supercycle - spans multiple centuries
• Supercycle - extends over multiple decades (around 40 to 70 years)
• Cycle - ranging from a year to several years
• Primary - spanning a few months to a couple of years
• Intermediate - covering weeks to months
• Minor - within weeks
• Minute - depicting days
• Minuette - reflecting hours
• Sub-minuette - measured in minutes

The Elliott Wave theory is utilized by traders to pinpoint an upward-trending impulse wave, where they opt for long positions, and subsequently short or sell the position upon the completion of the five-wave pattern, anticipating an upcoming reversal. While Elliott Wave theory aids in conceptualizing market structures for various traders and investors, constant adjustments made by traders when a rule is breached can decrease its reliability as a tool for trading decisions. Some argue that despite the market being fractal, forecasting its direction isn't guaranteed.

Like many trading strategies, the Elliott Wave theory possesses a devoted following who staunchly advocate for its efficacy. Every theory has its imperfections, yet integrating it into your analytical process during an upward trend (in conjunction with other indicators) could aid in predicting suitable points for setting a sell or short position.