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Elliott Wave principle

Elliott Wave analysis is a collection of complex techniques. Approximately 60 percent of these techniques are clear and easy to use. The other 40 are difficult to identify, especially for the beginner. The practical and conservative approach is to use the 60 percent that are clear.

When the analysis is not clear, why not find another approach conforming to an Elliott Wave pattern that is easier to identify?

To make it easier for our readers, we have come up with the following practical approaches to using Elliott Wave principles in trading.

The whole theory of Elliott Wave can be classified into two parts :
  1. Impulse Patterns
  2. Corrective Pattern

The whole theory is somewhat based on the Dow theory in that stock prices move in waves. Because of the "fractal" nature of markets, however, Elliott was able to break down and analyze them in much greater detail. Fractals are mathematical structures, which on an ever-smaller scale infinitely repeat themselves. Elliott discovered stock-trading patterns were structured in the same way.

According to Elliott, all the market cycles actually are results of the investors' reactions to outside influences, or predominant psychology of the masses at the time. He found that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided further into patterns he termed "waves".

The Elliott Wave Theory

The Elliott Wave Theory is based on a certain cyclic laws in human behavior psychology. According to Elliott, the market price behavior can be clearly estimated and shown in the chart as waves (wave is here an explicit price move). In the most simple and crude terms, the pattern he identified was of a 5 segment zig-zag that makes up all impulse (direction of the trend) moves and a 3 segment zig-zag that characterises all corrective moves. As if the phenomena seen was some sort of rhythmical ebb and flow like an ocean, he named these moves as waves. Fibonacci ratios are commonly associated with the number of waves and the distance that they travel. The Elliott Wave Theory says that the market can be in two large phases: Bull Market and Bear Market.

Elliott further proposes, as well, that all price moves on the market are divided into:
  1. Five waves in the direction of the main trend (waves 1 to 5)
  2. Three corrective waves (waves A, B, C).
The waves are divided into:
  1. Impulses that create a directed trend (bull or bear) and cause the market to move very actively (waves 1, 3, 5, А, С)
  2. Corrections (rollbacks) that are characterized by moving against the trend (waves 2, 4, В).

In his Wave Theory, Eliott was based on the waves subdivision principle. This means that every wave is a part of a longer wave and is subdivided into shorter waves itself. Every wave is subdivided into 3 or 5 waves. This subdivision depends on the direction of the longer wave. The main principle in the Elliott's theory is that every impulse wave consists of five shorter waves and every corrective wave (against the trend) is composed of three waves.

The longest cycle, according to Elliott, is called Grand Supercycle that is compose of 8 Supercycle waves. The latter ones are each composed of 8 Cycles, etc. For example. It can easily be seen that impulse waves and the subsequent corrective waves are proportional. The stronger impulse is, the stronger correction is, and vice versa.

The Elliott Wave Theory is criticized for there is not always a clear definition of when a wave starts or ends. Corrections are especially difficult in this regard.

Elliott wave

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