Wave

Written By:
Paul Tracy
Updated November 11, 2020

What is a Wave?

In investing, a wave is a pattern found in stock prices, technology, consumer trends or other areas. In technical analysis, the term often refers to Elliot Wave Theory.

How Does a Wave Work?

Elliot Wave Theory is a method for predicting stock prices by identifying certain trading patterns. Specifically, the theory states that markets move up in a series of five waves but move down in a series of three waves. The theory looks to investor psychology for key information.

Generally speaking, though, a "wave" is a term used to describe a new way of doing things. For example, Congress could pass new legislation to encourage "crowdfunding," which in turn could drive a new wave of startups who get their capital from online, fund-raising websites. The change could forever change the pathways through which capital reaches companies, and as a result more people may engage in the startup economy. This in turn could create markets for other crowdfunding websites, due diligence consulting firms, startup legal services and branding work.

Why Does a Wave Matter?

It's easy to see how investing ahead of waves could be extremely profitable. New waves can spur significant economic growth in certain sectors, and learning how to identify or predict waves accurately can lead to very good investment decisions.