Elliot Wave Principle: Heart of Trading

Elliot Wave Principle: Heart of Trading

Success in stock market measured in terms of money earned, is firmly grounded in the science of analysis. People try to predict the market on the basis of news, intuition and emotions. Intelligent skilled analysts use various tools of technical analysis like trend following system (Moving Average cross over), Pattern analysis on different charts, Momentum indicators (RSI,ROC,STOCHASTICS) to  analyze the stock market.

No system is absolute in stock market

One can never predict on basis of news as market always discounts the news once it is out. The technical tools, in some phase of market provides huge return but are not consistent and may fail in other phase of market. This failure leads a skilled person frustrated and baffled. They start doubting their skills and curse their fortune. New technical system and methods appears and disappears. Technical gurus rise like comets and burn themselves out like meteorites. With arrival of every new guru and method, investors in large number will accept the latest fad as a touchstone for ultimate wealth, only to find bitter disappointment. So each method and each guru is discarded and new ones are sought but results are always the same.

Elliot Wave principle works on share market

Market- Most dynamic affair

Markets are efficient but 90% are driven by emotions. Every market movement represents sum total of individual emotional instability of players. Some knowledge of how mind works certainly helps one to understand the rhythm of share price behavior. This psychology is very well studied by R N Elliot and gave us the gift of wave principle theory. It is a tool with high probability of success which helps us to listen what stock market is saying by it. It is the only tool capable of coping up with changes ahead in the market and works in every phase of market consistently. Investors have been taught to believe that future repeats static, traditional repetitive past parameters that have been established will continue to offer guidelines. This is the logic of static force. Wave principles have no place for such irrelevant logic because according to it markets are dynamic affair and never static.

Wave Principle Theory has all the solutions

Wave principle is appealing to those who know that stock market offers no absolute. It will do what it wants and when it wants. What one need to succeed is guidelines to define probabilities and knowledge to weigh them, followed by confidence to act on judgment and not thrown off balance by the arrival of improbable!
According to Elliot Wave Theory “wild senseless and apparently uncontrollable changes in share price from year to year, month to month, day to day and hour to hour link themselves into a law abiding rhythmic pattern of wave. Sequence repeated itself from hourly movement to massive market movement over decades. So by establishing exact position of current market movement within major cyclical force, one can determine degree of maturity of market within any particular trend and so with courage can plan their investment accordingly.

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Also Read : Fibonacci Numbers: How important are these for Trading?

How Elliot Theory works?

According to Elliot, price trends takes place in basic 5 wave rhythm with 3 waves in direction of primary trend and 2 corrective waves against primary trend. This 5 wave rule applies to both bull and bear market. As Elliot cycle unfolds we find series of impulse wave which eventually rises excessively due to speculation. Corrective wave then occurs so excess will be eliminated and cycle continues.

How Elliot Wave Works

Minuettescycle forms the minor cycle which in turn forms the intermediate cycle. The building continues upward through intermediate cycle, primary cycle and so on up to grand super cycle which span many decades. So at any point of time there is existence of many cycles and that influence the price movement. Interlinkage of this cycle and combining them with Fibonacci relationship can be used to estimate the future price. These waves are created due to human psychology and they are most consistent in their form, patterns and relationship with each other.

Traders and investors’ major failure is due to non acceptance of wave formation and the ignorance of wave personality and guideline they offer. Impact of news, strength of pattern analysis, trend following techniques etc works positively only if their presence are on a particular wave (1,3,5). News can affect the time cycle but cannot alter the cycle.
Never believe that “head and shoulder” top means market will always go down or rounding saucer points the end of bear market.

Head and Shoulder pattern: Gives bearish indication, but if it is found on the 4th wave it will be a failure and price will not go down as expected.

Rounded Saucer formation- Gives bullish indication but if it is found on completion of 1st,3rd or 5th wave then it will turn out be bearish drastically.

Elliot wave theory completely supercedes most form of pattern categorization of share price movement. Elliot principles give investors the ability to project movement forward in time within precise parameters of probability. It helps to reduce the risk of our trades if we can recognize the wave number.
For example First minor wave of first intermediate wave of corresponding primary trend is always safe. Waves are fibonaccically related to each other. So using wave principle, one can precisely calculate the future price movement and anticipate the trend with degree of clarity even for long term which is well beyond the reach of any other analytical system.

Elliot Wave Chart

Exemplary Warren Buffet started investing from 1950 and became a billionaire on paper in 1990.

Elliot Wave, when Warren Buffett became a billionaire

Warren Buffet selected 1st wave of a cycle for investment. If this was not the wave selected for investment, his long term investment also would not have offered any return.

Also Read : Facts You May Not Know About Warren Buffett

Thus Elliot Wave Theory is one of the most important developments in the field of Technical analysis. It is the means of enhancing investment performance. Using Elliot wave theory, traders’ acquire power to anticipate trend in a manner far beyond the reaches of those who are not acquainted with wave principle. When this is mastered luck will play only minor role in prospective investment performance.

Elliot wave principle is truly the heart of trading and investing.

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One Comment
  • Fibonacci Retracement | Trade Smart Online Blog says:

    […] Also Read : Elliot wave principle – Heart of Trading […]


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