Intro to Elliott Wave Theory
“Random Walk” – not a chance!
Anyone ever tell you the markets are “Random Walk“?
Ever hear that term? Random walk.
You have my permission to laugh at them. They don’t have a clue.
“Elliott rules.”.!!!
It’s REAL. It exists.
It just takes an artful eye to “decipher” it “real-time”.
BUT!!!
There’s enough permutations, and enough “fundamentals”, and enough “time-factors” to make one say,
“I DON’T KNOW WHAT THE COUNT IS.!”
It does “come out in the wash” though. Eventually.
It all depends on the context. Yearly? Monthly? Hourly? 10-minutes?
And there are just enough patterns to make interpreting it VERY difficult. Sometimes it’s “clear as a bell”.
When that happens it's beautiful, it’s exhilarating.
There are 13 “patterns”. For both, Bull and Bear.
(A “Fibonacci” number no less.
You see, there’s a connection between Elliott and Fibonacci.
I’ll discuss Fibonacci next week.)
R.N. Elliott Bio - the Beginning
Today is “Ralph Nelson Elliott” day. I just declared it so.
Mr. Nelson was an accountant. He was an ex-pat working in Central America, and Mexico at the turn of the century – 1900.
It was while working there he acquired a debilitating disease and had to retire early. He began studying the stock markets. And their cycles.
It was 1924.
In 1938 he published his 3rd book, “The Wave Principle”.
Later, in the early 1940's, Elliott went further.
He applied his theory to all mass human nature.
“Nature's Law –The Secret of the Universe”,
his last and most complete book, was published in 1946.
At the bottom of every Elliott Wave International’s “Theorist” and “Financial Forecast” is what they believe to be the underlying “core” of the Elliott Wave Theory. I have tried to put it into my own words to keep the true meaning and not plagiarize:
“The Elliott Wave Principle
is a detailed description
of how financial markets behave.
It is based on a philosophy that,
mass human psychology
swings from pessimism to optimism and back
in a natural sequence.
Thus creating specific Elliott wave patterns in price movements.
These patterns represent society’s ebb and flow,
society’s ups and downs.
Each pattern has implications
regarding the position of the markets
and mass human progress and regress
within humankind’s overall progression
past, present and future.”
Modern Day
Robert Prechter and A.J. Frost published “Elliott Wave Principle” in 1978. This is “my Bible”. I have read a half dozen or so books by Ralph Nelson Elliott. And several more by Robert Prechter.
Now to the “meat” of the story. A sampling of the technical “guts” of Elliott Wave Theory.
*** NOTE -
I have been studying Elliott Wave Theory for 28 years. It is very “heavy duty”. What I’m going to try and put down here is a concise synopsis – Elliott Wave 101. It’s not gonna be easy. But, here goes. ***
There are 8 movements to a “full basic cycle” of a trend.
A movement up, or down, and it’s “correction”. (This is another Fibonacci number.)
3 impulse waves up (or down) with 2 corrective waves in the opposite direction. These waves are “numbered”, 1 – 5.
A 3-wave corrective leg follows. These waves are “lettered”, A – B – C.
A total of 8.
Then the whole “cycle” is repeated. Basically. More or less.
1 2 3 4 5 – A B C ... 1 2 3 4 5 – A B C … … …
However, there are “extensions”. There are “double” and “triple” corrections. (Note: there are NO quadruple corrections. One of the “RULES”.)
There are “triangles”. Both in impulse waves and corrective waves.
There are “RULES”. And there are guidelines.
There are “channels” that “contain” a trend’s waves. Along with implications and “RULES”. And guidelines.
Most of the time Elliott Wave is applied to the larger stock indices. And of course it’s NOT just American indices. It, Elliott Wave, applies to most all world stock markets.
The Bond markets, FOREX, Gold & precious metals can have Elliott applied. Even individual stocks sometimes can be “deciphered” with Elliott Wave Theory.
However, as the description above states,
“ … based on a philosophy that,
mass human psychology
swings from pessimism to optimism …
These patterns represent society’s ebb and flow,
society’s ups and downs.
… mass human progress and regress … “
it stands to reason large financial markets work best.
Individual stocks simply don’t represent “mass human” / “society’s” quite as well.
I have a theory that takes the larger financial markets one step further.
Put all the world’s markets together and get even “more mass human” psychology. Especially now that the world is “smaller” and inter-dependent. And of course, incorporating the Internet. But, that’s beyond the scope of this article. Another day.
As I stated earlier, this is “Elliott Wave Theory 101”.
I could go on and on. Not really knowing exactly where to stop.
Hopefully I’ve whetted your appetite. Piqued your curiosity.
The “elephant-in-the-room” I want you to take away from this “intro” is my version of “Elliott Wave International’s” core philosophy –
“mass human psychology”.
I’ll stop here. With the last words being, if you wanna learn more, do!
I’ve been a student forever. I sit for hours sometimes and try “counting waves”. It’s a little like chess. If this is the “count” then this is what’s coming. If this “alternate wave count” is better, then “this” is what’s gonna happen. You have to “backtrack”, too. To make sure your current “count” is compatible with the past. And doesn’t break any of the RULES.
You have to “zoom in” and “zoom out”. In other words, ya gotta look at 10 minute charts and hourly charts as well as daily and weekly and monthly charts.
It’s “complex”.
I‘ve done some amazing trading using Elliott Wave. Others have too. My mentor to name one – Robert Prechter. I’ve also misinterpreted it and lost too.
Where to Go Next
If you’re interested but don’t have the where-with-all to do it yourself, might I suggest getting a subscription to EWI’s “Financial Forecast” or the “Elliott Wave Theorist”. And let them do the work for you.
(No, I’m not getting paid for this endorsement. I just believe.)
Doing this will put you in the best position for knowing where you/we/the World are/is in terms of Bull and Bear markets.
“CONTEXT”
“Is this the start of a new trend? or just a correction”.
All for now.
Stay tuned for next week’s “Fibonacci 101”.
{Note: my FK score is: 71.2 / 5.1 / 3.2%}
