Without a doubt, Elliott Wave Theory is one of the most consistent and reliable technical indicators that a trader or investor can have in his technical analysis toolbox.
There are only a handful of clearly defined rules for the proper application of Elliott Wave Theory and even a basic understanding of these rules and wave pattern recognition can help deliver consistent gains, and enable traders to find a new level of profitability that they have struggled to achieve before.
The Elliott Wave Principle itself is founded on the concept that the Stock Market price fluctuations are a reflection of the herd mentality of the mass population's natural instincts rather than the more widely held notion that it is driven by the latest news headline.
Since the Wave Principle was discovered in the 1930s by R.N.Elliott and brought to the forefront of modern technical analysis in the 1980s by the publication of Frost and Prechters Elliott Wave Principle, evidence of Elliott's Wave Theory has been found throughout many forms of social trends.
It is a concept that can be found in any arena that is subjected to social trends and with mass participation, from political trends to fashion trends. However, the wave theory is found to show up best in the movements of Stock Market prices. This is where the raw emotions of that herd mentality is generally seen at its most extreme as the prevailing social mood fluctuates between the extremes of fear and greed at different degrees of trend.
There is little that incites much more extremes of raw emotion than looking on in disbelief as your savings simply disappear when the markets are going against you, or that feeling of excitement and satisfaction that you get when it is racing ahead in the right' direction.
Learning the basics of Elliott Wave Theory can help traders and investors in a number of ways in whatever time frame they are interested in, whether it is for day trading, swing trading or taking a long term investment
Recognize patterns within trends Recognizing the wave patterns can assist traders in keeping a balanced view of where prices are likely to go rather than getting caught up in that mood of the moment.
Identify a change in trend' in the early stages Identify trend changes in their infancy to know when to get out of a position with maximum profit. Catching a new trend in the initial phase also enables stop loss levels to be kept as tight as possible and ensures that damage is limited if a pattern is wrongly identified.
Forecast price targets Use the common ratios between related waves in a pattern to set price targets and where to expect retracements to find support or resistance.
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