Elliott Wave Theory is a technical analysis framework that identifies recurring wave patterns in financial markets, reflecting collective investor psychology. According to this theory, markets move in a five-wave pattern during a trend. The first wave marks the initial move in the direction of the trend, followed by a second wave that retraces a portion of the first wave’s movement but does not exceed its starting point. The third wave is typically the strongest and longest, advancing beyond the end of the first wave. This is followed by the fourth wave, which serves as a corrective phase, retracing part of the third wave before the final leg up in wine tasting brda wave five completes the five-wave sequence.

In this context, the fourth wave acts as a necessary correction before the anticipated upward movement in the fifth wave. Typically, wave four corrections retrace between 38% and 50% of wave three’s length, providing potential entry points for traders expecting the final push upward. However, one key rule of Elliott Wave Theory is that wave four should not overlap the price territory of wave one, except in specific formations like diagonals. Additionally, the nature of wave four’s correction often contrasts with that of wave two, a concept known as the guideline of alternation.

While Elliott Wave Theory offers a structured approach to market analysis, its interpretation can be subjective, leading to different conclusions among analysts. Therefore, traders often use this theory alongside other technical analysis tools and consider broader market factors when making trading decisions.