Ralph Nelson Elliot, born in USA, developed his wave theory in 1930’s, after he discovered that stock markets go up and down in repetitive patterns . He also noticed that they are fractal in nature and larger patterns when zoomed into show similar patterns in smaller ranges.
The similar patterns or waves , he further found , were different in nature when markets were going up from the downward movements. His numbering of the waves was the start of , what may be called the elliot language , which he further refined as the years went by.
The basic structure of the elliot wave analysis is 5 waves up with 3 waves down. The 5 wave up, or the impulsive wave is numbered from 1 to 5 and the down three wave movement or the corrective wave is donated as a,b and c.
This forms the simplest way of describing the basic elliot wave structure and forms the EVER ENGULFING fractal form of the markets.
With time , the above theory was interwoven with fibbonacci ratios , which are ratios based on nature and said to be found in each and every part in this universe. Once this interlinking happened, it was further discovered that natural calamities and major world events were found to happen around the same time as that of completion of THE 5TH WAVE IN THE LARGER TIME FRAMES. Physical happenings in this world actually could be seen happening around the time of completion of major cycle waves in the stock markets(That is where huge masses participate and results are recorded.)!!!
However above was an accidental discovery and the veracity of above is still under debate.
Elliot wave theory is a work in progress as it deals with a much larger concept of ever changing way we trade . With the advent of computers ,softwares and automated trading concepts (algorithmic trading) which actually moves away from emotional trading in the markets, and actually works against the wave theory, the patterns in the market today are probably different before the advent of softwares. This raises the need of NOT to be fixated on the traditional elliot wave theory but to take the basic structure of the theory as a foundation and build on it through experience and observation.