Low Risk, High Reward Trading Experiment

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Technical Analysis Articles | Written by Ian Copsey | Oct 23 06 |

Why is Elliott Wave so Useful?

The most accurate method of forecasting

"the good points are:

 

1. Elliott Wave can predict market moves to the point at times - nothing else can
2. Waves are related and thus you can use Fibonacci relationships to recognize waves, where they started and where they have greatest chance of ending
3. It tells you how a move will occur. This is vital
4. It will warn you that your wave count may be breaking down if the wave development doesn't go as planned
5. It is the only form of analysis (that I know of) that gives you an understanding of market behavior as if it is an extension of a living force
6. The principal helps an analyst/trader to understand the structure of a market from monthly charts down to 1 minute charts, a reflection of the fractal nature of markets.
7. It can provide incredibly easy trades from time to time just using basic guidelines....."

http://www.actionforex.com/articles_...2006102312488/


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Originally posted by itme
It would then be possible for me to employ a 30% Risk Factor, because with a 30% Risk Factor I would need to lose 8 trades in a row to come close to being put out of business

Quoting itme

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Technical Analysis Articles | Written by Ian Copsey | Oct 23 06 |

Why is Elliott Wave so Useful?

The most accurate method of forecasting

"the good points are:

 

1. Elliott Wave can predict market moves to the point at times - nothing else can
2. Waves are related and thus you can use Fibonacci relationships to recognize waves, where they started and where they have greatest chance of ending
3. It tells you how a move will occur. This is vital
4. It will warn you that your wave count may be breaking down if the wave development doesn't go as planned
5. It is the only form of analysis (that I know of) that gives you an understanding of market behavior as if it is an extension of a living force
6. The principal helps an analyst/trader to understand the structure of a market from monthly charts down to 1 minute charts, a reflection of the fractal nature of markets.
7. It can provide incredibly easy trades from time to time just using basic guidelines....."

http://www.actionforex.com/articles_...2006102312488/


Robert Kelley of E.W.I., a former technical analyst at J.P. Morgan Chase & Co., said:

"It’s the single best tool for technical analysis because it provides a framework of expectations and tells you when you’re wrong.’’

Source: Bloomerg Financial News

Elliott Wave Theory - an introduction

Elliott Wave Theory was originally espoused by R.N.Elliott in the 1920’s and made popular through the work of Frost and Prechter through their many books and market calls. Robert R. Prechter calls have since become legendary, and he has gone on to become a best selling author. Frost and Prechter predicted, in the middle of the crisis of the 70s, the great bull market of the 1980s. Not only did they correctly forecast the bull market but Robert R. Prechter also predicted the crash of 1987 in time and pinpointed the high exactly. He followed up with the ensuing bull market and resultant bear market. The KnovaMind partners have been great students of their work and the work of Mandelbrot who proved the existence of fractals in his book "The Fractal Geometry of Nature" in the 1980’s. He recognized the fractal structure in numerous objects and life forms, a phenomena Elliott already understood in the 1930s.

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Nature’s Design

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Elliott Wave Theory interprets market actions in terms of recurrent price structures. The Wave Principle" is Ralph Nelson Elliott’s discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Using stock market data as his main research tool, Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature. From this discovery, he developed a rational system of market analysis.

Elliott isolated thirteen patterns of movement, or "waves," that recur in market price data and are repetitive in form, but are not necessarily repetitive in time or amplitude. He named, defined and illustrated the patterns. He then described how these structures link together to form larger versions of those same patterns, how they in turn link to form identical patterns of the next larger size, and so on.

In a nutshell, then, the Wave Principle is a catalog of price patterns and an explanation of where these forms are likely to occur in the overall path of market development. Elliott’s descriptions constitute a set of empirically derived rules and guidelines for interpreting market action. Elliott claimed predictive value for The Wave Principle, which now bears the name, "The Elliott Wave Principle”.

Elliott Wave Theory - the key discovery

Master Elliott Wave tactitican Robert Prechter in an interview in 1998 best describes this;

"Elliott’s most important discovery was that the patterns that develop in the stock market occur at all degrees of trend. The larger patterns are made up of components that are themselves composed of smaller ones. The same patterns on a smaller scale combine to create any one of those patterns on a larger scale. The larger pattern will combine with several others of the same degree to create an even larger pattern and so on. He described in detail exactly what those patterns look like. He identified 13 of them. Only recently has data been available for general stock prices back to the late 1700s, and the patterns are there as well. The market has a life of its own. It is mass psychology that is registering. Changes in feelings show up directly as price changes in the barometer known as the DJIA, or the S&P 500, or any other index. The Wave Principle is a catalog of the ways that the crowd goes from the extreme point of pessimism at the bottom to the extreme point of optimism at the top. It is a description of the steps human beings go through when they are part of the investment crowd, to change their psychological orientation from bullish to bearish and back again."

Basically, Market cycles are composed of two major types of Wave:

 

1. Motive Waves (There are two types of motive waves: impulses and diagonal triangles) For every motive wave, it can be sub-divided into 5 - wave structure (1-2-3-4-5), while for corrective wave, it can be sub-divided into 3 - wave structures (a-b-c). Their structures are called "motive" because they powerfully impel the market.
2. Corrective Wave . Corrective mode is employed by all countertrend interruptions, which include waves 2 and 4 in Figure 1-1. Their structures are called "corrective" because they can accomplish only a partial retracement, or "correction," of the progress achieved by any preceding motive wave. The internal structure of the patterns, this will enable you to recognize a pattern within a pattern.

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