In the 1930s, Ralph Nelson Elliott discovered that financial markets follow recurring patterns, which he called waves. These patterns repeat on all timescales and are nested within each other, revealing the fractal nature of markets.

Under Elliott wave theory, a complete market cycle consists of a wave of progress, called a motive wave, followed by a wave of partial retracement, called a corrective wave. Motive waves form a 5-wave pattern (labeled 1-2-3-4-5), while corrective waves typically form a 3-wave pattern (labeled A-B-C). The Elliott wave model comprises strict rules and probabilistic guidelines governing all aspects of the fractal.