Within the Elliott Wave Theory, there are a series of categories to describe the waves in order of the largest to the smallest.Grand Supercycle
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Sub-Minuette
Ralph Elliott discovered that all patterns are built in the same way. His impulsive wave, which goes with the main trend, always shows five waves in its pattern. Within each of the impulsive waves which are on a smaller scale, five waves can be found. In these smaller patterns, the same pattern repeats itself again and again. These smaller patterns are each labeled as different wave degrees within the Elliott Wave Principle.
As with any theory that is new to you, this probably all seems a little confusing. That may be due to my poor explanatory skills. If it is, I apologise. However, it is vital that you get some sort of understanding of this principle in more depth.
Simply put, to make investment profits you are competing against the rest of the global investment community. They ALL know how this stuff works and if you plan to be involved, it is vital that you understand some of it too. You may not feel it necessary to be able to analyse these things yourself (I don't), but when you read and article or newsletter of note, you will find it useful to understand the wave patterns they talk about. It all comes from Elliott Wave Theory.
Most other trading strategies refer to EWT somehow. If you get the chance, I urge you to spend some time reading one of Robert Prechter's books on the subject of Elliott Wave Theory. It will help you immensley
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Saturday, October 11, 2008
More About Elliott Wave Theory
Very Basic Elliott Wave Theory
As you will have seen on previous pages, Elliott Wave Theory was first discovered by Ralph Elliott towards the end of the 1920s.
Elliott found that stock markets, which were thought to behave in a somewhat random manner, did not. He spotted that they traded in repetitive cycles. The emotions of investors as a cause of outside influences, created these cycles. He said that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns. These patterns were then divided into what he termed to be 'waves'.
This link to waves means that his theory is somewhat based upon the Dow Theory. (Please accept my apologies in advance if the following description isn't as lucid as you might hope. I don't claim to be an Elliott Wave Theory expert, but I do find the work of EWI to be very useful.)
People involved with Elliott Wave do not claim that it is a forecasting tool, it does appear to be one of the best, if not the best forecasting tool available. Instead, the tool is a detailed description of how markets behave. From understanding how a market behaves, it is then possible to predict how it will behave in the future.
Of course any stock index is made up of component companies, however the actual trading is done by real people. Elliott Wave therefore also offers observations about the habits and patterns of humans. While this may be less useful to many than stock predictions, it too has many uses.
It could therefore be said the the social nature of man governs Wave Theory.
Alterations in price are divided into trends and corrections or sideways movements. Trends show the main direction of prices. While corrections move against the trend. Elliot called these 'impulsive waves' and 'corrective waves'.
My understanding of The Elliot Wave Theory is:
Every action is followed by a reaction.
There are five waves in the direction of the main upward trend followed by three corrective waves
This is known as a 5-3 move. A 5-3 move is a full cycle
This 5-3 move then becomes a subdivision of the next higher 5-3 wave
Whilst all this may sound a little complex, it does become much clearer when explained properly and in more depth (you have to buy the book for that!) and the regular reports written by Prechter often make for a surprisingly good read.
A Brief Biography of Robert Prechter
Robert Prechter has been publishing the Elliott Wave Theorist every month since 1979. Previous to this he worked as a Technical Market Specialist for Merrill Lynch for four years.
Robert Prechter has won numerous awards for his market timing ability and has become the both the public face and president of Elliott Wave International. He has written and co-written a number of books about market timing, Wave Theory and socio-economics. I don't think it would be an overstatement to call him a leading market thinker.
I first read his book Elliott Wave Principle in around 2001. I won't lie to you, it isn't a walk in the park. You need to concentrate and really work to understand some of it. If you plan to be an investor, understanding the theory of waves will be interesting to you. It will probably be worth the effort.
However, if you plan to trade in the market, this book is a must read. Even if you as a trader do not plan to use Elliott Wave Theory to help you, you must realise that virtually every other competent trader, investor and fund manager has read the book. Most fund managers and traders will refer to wave patterns to help them make investment decisions.
Knowing and understanding what many of the other market participants are thinking and the understanding the numbers they are analysing will be of invaluable benefit to you.
Once your knowledge of waves begins to grow, you may even become an Elliott Wave trader yourself. Understanding the market moves and smaller waves within a larger wave movements will open up many new profitable trading opportunities.
Who Was Ralph Elliott?
Ralph Elliott had the type of career that would be astounding even today...
He is remembered as the father of The Wave Principle, now known as the Elliott Wave Principle which is a number analysis system which can be used to predict many things in life, including market movements.
Elliott was born in Kansas in 1871. In his early career he worked for around 25 years as an accountant, often in executive positions. Many of these positions were held in Central America and Mexico. He learned skills of financial management and corporate reorganisation. In 1924 he became Chief Accountant for Nicaragua. Later in life he was struck by illness and turned his attentions to analysis of the stock market. He was completing a goal that he had expressed in a book he had written about Latin America: "There is a reason for everything, and it is [one's] duty to try to discover it."
Investigating the possibility of form in the marketplace, Elliott examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various indexes covering 75 years of stock market behavior. In 1934 his observations began to form a set of principles about wave movement and the application to stock prices.
In 1946, his finest work was published, Nature's Law - The Secret Of The Universe. The first 1000 copies sold out quickly to financial analysts and the position in history of Ralph Elliott was set. His research is now used by thousands of fund and money managers around the world to assist their decision making.
In the modern financial world, the leading interpreter of wave priciples is Robert Prechter.
