Learning The Elliott Wave Principle
The Elliott Wave Principle originated in the 1930s
, when a corporate accountant by profession, Ralph Nelson Elliott, observed price activities in the financial markets and found the recurrence of certain patterns. He was able to make precise stock market forecasts.
When Elliott Wave Theory was first discovered by investors and traders, there were many reactions - disbelief, irrational exuberance and finally recognizing the principle as a valuable tool.
Just like all other systems or structures found in the nature, the more you observe the wave patterns, the more structured complexity you will find.. It is structured, because nature's patterns build on them, making similar forms at increasingly larger sizes. One can see these fractal patterns in physiology, geography, botany, and human created things, like roads, residential subdivisions and - as recent findings have established - in market prices.
Natural systems, along with Elliott wave patterns in market charts, grow with time, and their forms are defined by breaks to that growth.
The meaning of that is - like the formation of any life form on earth, from mere cells to a well structured human or any other species, the growth is steady and progressive. The structured progress and regress is important to all life forms. The same is the case with market data, according to Robert Prechter, Jr., the world's first Elliott wave analysis expert and the President of Elliott Wave International.
The primary step in Elliott wave analysis is recognizing patterns in market prices. At their base, wave patterns are straightforward; there are only two of them: "impulse waves," and "corrective waves."
Impulse waves are made of five sub-waves and move in the same direction as the trend of the next larger size (labelled as 1, 2, 3, 4, 5). Impulse waves powerfully impel the market, which is why they are named.
A corrective wave follows, consisting of three sub-waves. A corrective wave moves against the trend of the next larger size (labelled as a, b, c). Corrective waves achieve only a prejudiced retracement, or "correction," of the advancement achieved by any preceding impulse wave.
One complete Elliott wave is made of eight waves and two phases of which five are impulse waves with sub-waves denoted by numbers, and three are corrective waves whose sub-waves are denoted by letters.
The Elliott Wave Principle, discovered by R.N. Elliott, sets out to describe how the market in reality behaves. A number of precise discrepancies are there on the fundamental theme, which Elliott scrupulously portrayed and exemplified. He also distinguished the vital fact that each pattern has individual requests as well as propensities. From these remarks, he devised numerous rules and guidelines for proper wave identification. Systematic information of such details is essential to understand what the markets can do, and at least as important, what it does not do.
Using Elliott Wave Theory, traders can predict the market trends and countertrends, predict the maturity of a trend and moreover find the protective stops for their investments.
by: Gen Wright
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