The Wave Principle—Dow Theory tells people what the ocean is, while the Wave Principle teaches you how to surf on it.  

The Elliott Wave Theory is one of the most commonly used tools for trend analysis. Mass psychology is a key basis of this theory, making it less effective in inactive or illiquid trading markets.  

The Wave Theory is an analytical tool invented by the technical analysis master Ralph Nelson Elliott (R.N. Elliott). Unlike other trend-following technical methods, the Wave Theory can predict when a trend will end as soon as it is established, making it one of the best forecasting tools available.  

American securities analyst Ralph Nelson Elliott (R.N. Elliott) used the Dow Jones Industrial Average (DJIA) as a research tool and discovered that the ever-changing structural patterns of stock prices reflect the beauty of natural harmony. Based on this discovery, he proposed a set of related market analysis theories, refining 13 patterns or waves in the market. These patterns repeat in the market, though their timing and amplitude are not necessarily reproducible. Later, he found that these structural patterns could be connected to form larger patterns of the same type. This led to a series of authoritative interpretive rules to explain market behavior, with particular emphasis on the predictive value of the Wave Principle. This is the renowned Elliott Wave Theory, also known as the Wave Theory.  

The Wave Theory is a tool of special value, reflected in its universality and precision. Its universality lies in its applicability to many areas of human activity, often with incredible effectiveness. Its precision is demonstrated in its astonishing accuracy in confirming and predicting trend changes, surpassing other analytical methods. At the time, precisely half an hour before the U.S. stock market bottomed, Elliott predicted that a super bull market would emerge in the coming decades. His prophecy was in stark contrast to the still bearish market sentiment, as most people could not imagine the Dow Jones Industrial Average surpassing its 1929 peak (386 points). However, history proved the Wave Theory right!  

What Are Waves?  

Waves refer to the fluctuations in stock prices, much like the tides and waves of nature—one wave follows another in a cyclical manner, exhibiting considerable regularity and moving in a "recognizable pattern" of advances and reversals. These patterns repeat in form (though not necessarily in timing or amplitude).  

Human understanding of stock market fluctuations is a world-class challenge. To date, no theory or method has been convincingly and consistently validated over time. In 2000, renowned economist Robert Shiller pointed out in *Irrational Exuberance*: "We must remember that stock market pricing has not become a perfect science." In 2013, the Royal Swedish Academy of Sciences, when awarding the Nobel Prize in Economics to Robert Shiller and others, noted that almost no method can accurately predict the direction of stock or bond markets over days or weeks, but it might be possible to forecast prices over three years or more through research.  

Currently, representative theories on financial asset pricing and stock market fluctuation logic include the following: Keynes' Beauty Contest Theory, Random Walk Theory, Modern Portfolio Theory (MPT), Efficient Market Hypothesis (EMH), Behavioral Finance (BF), and Evolutionary Securities Analysis (EAS).  

From the perspective of research paradigms, analytical methods in stock investment can be divided into three categories: fundamental analysis, technical analysis, and evolutionary analysis.  

Just as traditional Chinese medicine and Western medicine differ fundamentally in epistemology and methodology, these three analytical methods are based on entirely different theoretical systems and logical structures. Each focuses on a specific aspect or dimension of market operations, with its own rationality and limitations. Yet, all are indispensable for a comprehensive understanding and exploration of stock market behavior. Their theoretical foundations, assumptions, and paradigm characteristics differ, making them interconnected yet distinct in practical application.  

The interconnection lies mainly in the operational level of investment decision-making—technical analysis requires the support of fundamental analysis to avoid "climbing a tree to catch fish," while both technical and fundamental analysis must be integrated into the framework of evolutionary analysis to enhance their scientificity, applicability, effectiveness, and reliability.  

The key differences lie in the philosophical understanding of the relationship between humans and the market:  

- Technical analysts believe the market is correct, with stock price movements already reflecting all useful information. Their core philosophy is "follow the trend and correct mistakes promptly."  

- Fundamental analysts believe their own analysis is correct, and market errors occur frequently. Their core philosophy is to "buy low and hold long" by exploiting market mistakes.  

- Evolutionary analysts, drawing from life science principles and biological evolution, argue that the right or wrong of markets and investors—whether in form and content (corporate value, market valuation) or in time and space (overvaluation, undervaluation, overbought, oversold)—lacks absolute, universal, constant, or uniform standards. Instead, it largely depends on the co-evolutionary process of human weaknesses and market ecology. Their core philosophy is "everything is premised on biological instincts and evolutionary laws."  

It is worth noting that the Elliott Wave Theory is one of the most important technical analysis theories. If Dow Theory tells people what the ocean is, the Wave Theory teaches you how to surf on it.