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Theory Elliott Wave: Introduction
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Elliot Wave
The Theory of Elliot Wave was developed by Ralph Nelson Elliott in the 30s of the 20th century and published in his book “The Wave Principle” in 1938. The theory of Elliot Wave is a detailed description of how financial markets move in cycles that repeat over time result in behavior and human psychology (traders and investors) that can be recognized in wave patterns formed by the movement price. Each of Elliot wave analysis must be seen within the overall market cycle and its progression from past, present and future. The analysis has implications Elliiot Wave techniques as well as a background of economic data to try to anticipate future market trends and best points of entry to identify market extremes (maximum and minimum).
RN Elliot in his book describes a pattern of markets in alternating patterns of 5 and 3 waves. This pattern corresponds to a mainstream phase that includes five waves numbered from 1 to 5 and a corrective trend phase includes three waves called with the letters A, B and C. This pattern, according to Elliot, is present at any level, and you analyze monthly charts or a minute. This analysis from higher to lower scales was based on the fractal nature of the market (Fractals are mathematical structures that are repeated indefinitely from higher scales to lower or vice versa). Elliot describes different cycles in response to the temporality.
- Grand Supercycle: can reach more than a century
- Supercycle: several decades (40-70 years)
- Cycle: 1 to several years (even decades)
- Primary: from a few months to several years
- Intermediate: weeks to months
- Minor: several weeks
- Minute: days
- Minuet: Hours
- Subminuette: minutes
As I said earlier, Elliot cycle is composed by two phases, one phase of mainstream trend and a corrective phase. The dominant trend phase consists of 5 waves, numbered 1 to 5. The corrective phase trend is composed of 3 waves designated by the letters A, B and C. Following the trend corrective phase sequence begins again.
Within each phase, the waves moving towards the main trend are called impulse waves. The waves that move in the opposite direction to the main trend are called corrective waves. Thus, in a general pattern of Elliot waves, waves 1, 3, 5, A and C are impulsive waves, each wave impulse can be subdivided into a pattern of five wave impulsive smaller stage. Waves 2 and 4 are corrective waves each wave corrective can be subdivided into a pattern of three waves of smaller corrective phase (A, B and C). This can be subdivided into sub-cycles infinite fractal Elliot wave symmetric. In a high cycle pattern will be 5 waves up – 3 down and vice versa in a bearish cycle.
The corrective phase trend is also divided into sub-cycles, the wave A and C contains a 5 wave pattern and wave pattern B contains a 3. Note here that the trend is different from the previous phase as waves A and C are impulsive (move in the direction of the trend that is currently in the market). See the image on the right can aclararte a bit what I mean.
The theory of Elliott Wave is closely related to the Fibonacci sequence. For example, guided tours of certain waves that usually coincide with decrease levels / Fibonacci extension. Another example is that as you go counting the number of waves is obtained by the Fibonacci sequence: 1-2-3-5-8-13-21 …
Unique characteristics of each wave Elliot
Talk as an example of referring to the waves of an uptrend cycle, similar downward trend will be for.
Waves of the mainstream phase
Wave 1: Wave 1 is the most difficult to identify because it is rarely obvious beginning. According to Elliot, at the beginning of an uptrend and the first wave in January, news that affect the price of the instrument operated are most opposite and above the downtrend is still considered quite strong. Another feature of this wave is that at this point the market can be high volatility and volume increase as prices rise. For technical analysts is not enough evidence at this stage to be alerted of the change in trend.
Wave 2: This wave “correct” a wave 1. Never lose more of the starting point of wave 1, usually the price never goes back more than 61.8%. During the formation of this wave, the bearish sentiment resumed their importance, the lower the price that were excited by the strength of the previous downtrend trust her again. Signs confirming that we are in wave 2 and can confirm this change of trend are the low volume during development of the wave, smaller in volume than during wave 1. Another sign to watch is the formation of a 3 wave pattern a, b, c.
Wave 3: The main feature is that wave 3 is usually the longest wave travel. Maybe at the beginning of this wave have been fundamental to be negative but soon the majority will become both positive and fundamental analysts and technical analysts will be immersed in the purchase. The pullbacks will be short. A good level as a target for wave 3 is the 161.8% Fibo extension of wave 1.
Wave 4: Wave 4 may be in lateral phase for a while although it is clearly correct. Usually does not recede beyond the 38.2% of wave 3.
Wave 5: This is the latest move for the mainstream. The volume is lower than in wave 3 and many momentum indicators may begin to show differences (prices make new highs over the past while new highs in the indicators are lower than before).
Wave corrective phase trend
Now the trend in the market will bear, is the natural correction of the upward trend that ends an Elliott Wave cycle.
Onda A: In a manner analogous to the wave 1, the wave is the most difficult to identify this phase. During the development of the wave A is still the most economic news will be positive and most of investors, traders, and analysts see no more than a correction within a bull market valid and active. A sign of this wave, again similar to the wave 1, is the increase in volume.
Wave B: Oda clearly corrective in which many take the opportunity to resume the uptrend but in reality this is no longer valid because we are now clearly at the stage of corrective trend. There may still be positive news but I begin to hear negative fundamental data. The volume during the development of this wave is far less than it had during the wave A.
Wave C: The main feature of this wave is the fall in price with marked increase in the volume, and fundamental economic news commensurate with the market’s negative sentiment. The C-wave amplitude reaches the 161.8% fibo extension of the wave A or lower.
Elliott Wave Count
I have to stop here because I learn to count Elliott Wave is a matter of much practice and great art. Did I say art? Yes, in my view the interpretation of the Elliot waves can be extremely subjective. As I said before somewhere in the article, the structure of the waves is repeated indefinitely ellit whether you get on a superstructure like a low substructure. That is why we always find a way to match Elliot waves on the graph to study. This is not to say that are not valid because for me it is a valuable tool to predict movements in the market, find points of entry and exit points either gains or losses.
The most I can do here is to give the three basic rules that, together with the characteristics of each wave up and given lots of practice, help you identify each wave. These three rules are widely accepted, used and recognized and skipping means that the wave count is incorrect:
Wave 2 will never go below the minimum of wave 1, if uptrend or above the high of wave 1 if downtrend.
Of the three impulsive waves (1.3 and 5), wave 3 is never the less.
Wave 4 will never end in the area of wave 1, except in some rare cases in which there is a rising wedge (if uptrend) or falling (if we are in downtrend). This wedge is neither more nor less than two converging lines (not parallel or divergent) none of them horizontal. You can see an example in the article on Wolfe waves .
Related posts:
- Recognizing the pattern using the Elliott Wave
- Elliott Waves:how it work
- Using Elliott waves to trade in Forex
- Basics of the Dow theory
- Models based trading channels: Wolfe Waves
Tags: analysis, Elliott Wave, Forex trading, Ralph Nelson Elliott, theory
