ELLIOT WAVE THEORY

By : Sohil Kumar

WHERE DID THE WAVE THEORY COME FROM?

Ralph Nelson Elliott is the father of the Wave Theory, which is commonly called and more accurately described as the Elliott Wave Principle. Born on July 28, 1871 in Marysville, Kansas, Elliott reached his ultimate achievement late in life by a circuitous route .

Elliott examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various indexes covering 75 years of stock market behavior. By November 1934, R.N. Elliott's confidence in his ideas of what is sometimes called the Wave Theory had developed to the point that he presented them to Charles J. Collins of Investment Counsel, Inc. in Detroit.

During the early 1940s, the Wave Theory continued to develop. Elliott tied the patterns of collective human behavior to the Fibonacci, or "golden" ratio, a mathematical phenomenon known for millennia as one of nature's ubiquitous laws of form and progress.

WHAT IS THE ELLIOTT WAVE PRINCIPLE?

• The Elliott Wave Principle is a detailed description of how groups of people behave. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns.

• These patterns can be seen in long-term as well as in short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece.

IMPULSIVE WAVES

• Consists of 5 waves

• Either upward

or downward

Trending

CORRECTIVE WAVE• Corrections are very hard to master.

• Most Elliott traders make money in the impulsive ones and lose it in the corrective ones

• 2 types :-

A) Simple Correction

B) Complex Correction

SIMPLE CORRECTION

• 3 way pattern

SIMPLE ZIG ZAG CORRECTION

A) There is only one pattern in a simple correction. This pattern is called a Zig-Zag correction. A Zig-Zag correction is a three-wave pattern where the Wave B does not retrace more than 75 percent of Wave A. Wave C will make new lows below the end of Wave A. The Wave A of a Zig-Zag correction always has a five-wave pattern. In the other two types of corrections (Flat and Irregular), Wave A has a three-wave pattern. Thus, if you can identify a five-wave pattern inside Wave A of any correction, you can then expect the correction to turn out as a Zig-Zag formation.

FLAT CORRECTION

In a Flat correction, the length of each wave is identical. After a five-wave impulse pattern, the

market drops in Wave A. It then rallies in a Wave B to the previous high. Finally, the market drops one last

time in Wave C to the previous Wave A low.

IRREGULAR CORRECTION

TRIANGLE CORRECTION

•

In addition to the three-wave correction patterns, there is another pattern that appears time and time again. It is called the Triangle pattern. Unlike other triangle studies, the Elliott Wave Triangle approach designates five sub-waves of a triangle as A, B, C, D and E in sequence.

FIBONACCI RETRACEMENT

• Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician Leonardo Fibonacci in the thirteenth century. However, Fibonacci's sequence of numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the series.

Investopedia http://www.investopedia.com/ask/answers/05/fibonacciretracement.asp#ixzz4ZCPiOx2k

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