Elliott Wave Theory

Ralph Nelson Elliott developed the Elliott Wave Theory in the late 1920s by discovering that stock markets, thought to behave in a somewhat chaotic manner, in fact, did not. They traded in repetitive cycles, which he discovered were the emotions of investors as a cause of outside influences, or predominant psychology of the masses at the time. Elliott stated that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided into patterns he termed "waves".



The theory is somewhat based upon the Dow Theory inasmuch as the price movements move in waves. It was understood by the technicians at the time that because of the fractal nature of the markets, Elliott was able to break down and analyze the markets in much greater detail.

Elliott was able to spot unique characteristics of wave patterns and make detailed market predictions based on the patterns he identified. Fractals are mathematical structures, which on an ever-smaller scale infinitely repeat themselves. The patterns that Elliott discovered are built in the same way. An impulsive wave, which goes with the main trend, always shows five waves in its pattern. On a smaller scale, within each of the impulsive waves of the before-mentioned impulse, five waves can again be found. In this smaller pattern, the same pattern repeats itself ad infinitum. These ever-smaller patterns are labeled as different wave degrees in the Elliott Wave Principle. Only much later were fractals recognized by scientists.

In the financial markets we know that "every action creates an equal and opposite reaction" as a price movement up or down must be followed by a contrary movement. Price action is divided into trends and corrections or sideways movements. Trends show the main direction of prices while corrections move against the trend. Elliott labeled these "impulsive waves" and "corrective waves".

The interpretation of the Elliott Wave Theory is as follows:

1. Every action is followed by a reaction.
2. There are five waves in the direction of the main trend followed by three corrective waves (a "5-3" move).
3. A 5-3 move completes a cycle.
4. This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
5. The underlying 5-3 pattern remains constant, though the time span of each may vary.

Let's have a look at the following chart made up of eight waves (five up and three down) which are labeled 1, 2, 3, 4, 5, a, b and c.

http://i.investopedia.com/inv/articl...is/elliot1.gif
You can see that the three waves in the direction of the trend are impulses, so these waves also have five waves. The waves against the trend are corrections and are composed of three waves.


http://i.investopedia.com/inv/articl...is/elliot2.gif
In the 70s, this wave principle gained popularity through the work of Frost and Prechter. They published a legendary book on the Elliott Wave, entitled "The Elliott Wave Principle – The Key to Stock Market Profits". In this book, the authors predicted the bull market of the 1970s, and Robert Prechter called the crash of 1987.

http://i.investopedia.com/inv/articl...is/elliot3.gif
The corrective wave formation normally has three, in some cases five or more, distinct price movements, two in the direction of the main correction (A and C) and one against it (B). Waves 2 and 4 in the above picture are corrections. These waves have the following structure:

http://i.investopedia.com/inv/articl...is/elliot4.gif
Note that the waves A and C go in the direction of the shorter-term trend, and therefore are impulsive and composed of five waves, which is shown in the picture above.




An impulse-wave formation followed by a corrective wave, form an Elliott wave degree, consisting of trends and countertrends. Although the patterns pictured above are bullish, the same applies for bear markets, where the main trend is down.

The Elliott Wave Theory has assigned a series of categories to the waves in order of the largest to the smallest. They are:

1. Grand Supercycle
2. Supercycle
3. Cycle
4. Primary
5. Intermediate
6. Minor
7. Minute
8. Minuette
9. Sub-Minuette

To use the theory in everyday trading, the trader determines the main wave, or supercycle, goes long and then sells or shorts the position as the pattern runs out of steam and a reversal is eminent.

one question i NEVER seem to find answers to in all videos and articles i've read about the Elliot wave theory is... HOW DO I IDENTIFY THE ORIGIN OF THE WAVES??? I mean... how do i draw or count the waves? where do i start from? how do i know where to start from? i've seen several examples on charts but no one ever seems to explain why they chose theirs points as the origin of the 1st wave.

So could someone please explain this to me? i know quite a bit about the Elliot wave theory now, but all that knowledge is USELESS cos i still can't apply anything i've learned.

so a little help PLEASE http://cdn.forexfactory.com/images/smilies/yim/sad.gif

Where to start is the subjective part of Elliott Wave Theory. You have to understand that waves are fractals and they are going on at multiple levels continuously. If you give me a particular currency and specify what time frame you would like to know about, then I will try my best to explain several time frames and explain why I started where I did on my count. I hope this helps.

You know where you are in the count by the larger degree, the New
Rule differentiations of waves, and the current degree, as verified with
lower degrees underneath.

Much of the trouble with EW in Forex has to do with insufficient pattern
development on the higher degrees of scale. This is simply due to the
enormous scale and where retail Forex was 'pasted' in to the global markets.

On the charts in MT4 you see data back to 1978. In that entire span you
will not see a complete pattern which fits the degree spanning that long.
It is clearly a corrective pattern but it is not complete.

Without an impulse wave of that same degree or larger you may not make
an absolute starting point. This leaves only smaller scale wave starts and
doing this in the middle of a correction does not make for good counts.

Not to say the counts cannot be done. You do find yourself quickly
getting all the way up to the largest degree however and run out of data.

I was able to find a wave differentiation on Cable and label a 30 year
stretch. Wave differentiation comes as an understanding of the "The
New Elliott Wave Rule" which I wrote and have only just recently released.

There is a post here about it if you are interested:
http://www.forexfactory.com/showthread.php?t=213760

But that is how technicians begin their counts. Nothing magic there - you
just absolutely must have a clearly defined impulse wave of obviously
larger degree.

World markets are in Cycle degree which spans Years to Decades and are
building Supercycle formations which span Decades to Centuries. To see
such a clear impulse at next higher to our current one would require
another 50 to 70 years or so of data.

This is similar to a stock IPO which at some point takes on the sector
and market dynamics whether right from the start or soon afterwards.
Forex has been grafted onto world markets in relative pricing but the
pattern where that took off from is corrective.

Cheers,
Cyclon

This is the biggest fraud going in trading and I am sick of it. This manure is taken up by traders learned and when they find they can't make any money out of it they start teaching this garbage to other traders.

It is a load of rubbish touted round by people like Robert Minor another guy that teaches traders rather than actually make a load of money trading. if its so good why does Pretcher, Minor not simply make oodles of cash with it?

Because wave theory is only good for teaching its no good for trading. Markets don't move in 5 and three waves, it is simply a lie. Grab a chart of any currency and look to see how many 5 waves up followed by three waves down you find.

You won't make a bean using this in trading I know I tried for three years to use elliot waves and lost money slowly. I then learned how to do it by watching a real trader and now I make money. I cringe when I see people using it and suggest you run a mile when anyone offers to teach you elliot wave theory.

Its time real trader on this forum stamped on this drivel

the only valid point that elliot makes is that Price moves in waves.

you simply cannot predict price as it is not a mathematical structure, it is not scientific.

to understand a chart we need to go back to basics bid/ask quote, as these prices are quoted for certain period of time we make time frames.

but what is a chart? it is simply a transaction record that shows the transactions people made.....so no FUTURE data can be predicted from this.

however by looking at what has been going on in the past.......we state "all things being equal we can expect x"

of course we are anticipating future transactions that might or might not be as we postulate.......

there is no secret formula and i believe elliot was looking for one.
people buy people sell, if you can mathematically predict human behavior then you can predict price. Humans act predictably unpredictable so does the market

yes you can predict human behaviour scinetifically. of course there is no secret formula - but the market is harmonious. it is not random. it is irrational - but it makes sense, red. yes you can use a chart to predict future swings - i do that all day

but then again , you're a quant - a pretty rowdy tough one too lol so yeah we are at a forked path. BUT - i can pretty much say fibonacci ratios are mathemetically part of natural science and so is planetary movement.. but again forked path. u wont belive so - and for you to actually 'believe' u gotta read a heck loada material


take care red - trade well (as usual hehehe )

Good Day Everyone,
I have a quick question, does anyone here use the Elliott Wave when trading?