Elliott Wave |
Wednesday, 23 April 2008 10:48 GMT
In the 1930s, Ralph Nelson Elliott, a corporate accountant by
profession, studied price movements in the financial markets and
observed that certain patterns repeat themselves. He offered proof of
his discovery by making astonishingly accurate stock market forecasts.
What appears random and unrelated, Elliott said, will actually trace
out a recognizable pattern once you learn what to look for. Elliott
called his discovery "The Elliott Wave Principle," and its implications
were huge. He had identified the common link that drives the trends in
human affairs, from financial markets to fashion, from politics to
Robert Prechter, Jr., president of Elliott Wave International,
resurrected the Wave Principle from near obscurity in 1976 when he
discovered the complete body of R.N. Elliott's work in the New York
Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave
Principle in 1978. The book received enthusiastic reviews and became a
Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's
forecast called for a roaring bull market in the 1980s, to be followed
by a record bear market. Needless to say, knowledge of the Wave
Principle among private and professional investors grew dramatically in
When investors and traders first discover the Elliott Wave Principle,
there are several reactions:
Disbelief - that markets are patterned and largely
predictable by technical analysis alone
Joyous "irrational exuberance"
- at having found a "crystal ball" to
foretell the future
And finally the correct, and useful response -
"Wow, here is a valuable new tool I should learn to
Just like any system or structure found in nature, the closer you look
at wave patterns, the more structured complexity you see. It is
structured, because nature's patterns build on themselves,
creating similar forms at progressively larger sizes. You can see these
fractal patterns in botany, geography, physiology, and the things
humans create, like roads, residential subdivisions... and
- as recent discoveries have confirmed - in market
Natural systems, including Elliott wave patterns in market charts,
"grow" through time, and their forms are defined by
interruptions to that growth.
Here's what is meant by that. When your hands formed in the womb, they
first looked like round paddles growing equally in all directions.
Then, in the places between your fingers, cells ceased growing or died,
and growth was directed to the five digits. This structured progress
and regress is essential to all forms of growth. That this
"punctuated growth" appears in market data is only
natural - as Robert Prechter, Jr., the world's foremost
Elliott wave expert and president of Elliott Wave International, says,
"Everything that thrives must have setbacks."
Basic Elliott Wave PatternThe first step in Elliott wave analysis is
identifying patterns in market prices. At their core, wave patterns are
simple; there are only two of them: "impulse
waves," and "corrective waves."
Impulse waves are composed of five sub-waves and move in the same
direction as the trend of the next larger size (labeled as 1, 2, 3, 4,
5). Impulse waves are called so because they powerfully impel the
A corrective wave follows, composed of three sub-waves, and it moves
against the trend of the next larger size (labeled as a, b, c).
Corrective waves accomplish only a partial retracement, or
"correction," of the progress achieved by any preceding impulse wave.
As the figure to the right shows, one complete Elliott wave consists of
eight waves and two phases: five-wave impulse phase, whose sub-waves
are denoted by numbers, and the three-wave corrective phase, whose
sub-waves are denoted by letters.
What R.N. Elliott set out to describe using the Elliott Wave Principle
was how the market actually behaves. There are a number of specific
variations on the underlying theme, which Elliott meticulously
described and illustrated. He also noted the important fact that each
pattern has identifiable requirements as well as tendencies. From these
observations, he was able to formulate numerous rules and guidelines
for proper wave identification. A thorough knowledge of such details is
necessary to understand what the markets can do, and at least as
important, what it does not do.
You have only just begun to learn the power and complexity of the
Elliott Wave Principle. So, don't let your Elliott wave education end
here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn
how to use this valuable tool in your own trading and investing.
For better understanding of Elliott Wave, get your Free Elliott Wave Tutorial now!
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