Elliott Wave
The
harmonic approach to trading the markets
is a cyclical one. Our tools for evaluating market
position and trend
are
pattern recognition, momentum analysis, Elliot Wave
Theory and dynamic
price
and time analysis. While some
technicians will attempt to force
wave counts on every market at every time, such an
approach is neither
practical nor profitable. 1.
Wave
theory
provides a
useful way to “frame out a market”. This structure
provides order
amidst chaos. 2.
Wave
theory
gives you the
tools to project extended price targets and capture
potentially large
moves
that you might otherwise miss. 3. Wave theory can help
you
make better trade management decisions and reduce
risk.
The
5
wave pattern comes directly from the work of R.N.
Elliott and was
re-introduced
to the trading community in 1978 in the book
Elliott Wave Principle by Howard Arrington R.N.
Elliott
studied price movement in the markets and observed
patterns that repeat
themselves. He used this discovery to make
accurate forecasts in
the
stock market. To the untrained eye, market
movement may appear
random and
unrelated. In reality, the markets are tracing
out patterns that
you can
learn to recognize and profit from. Mr.
Elliott named this
discovery the 'Wave Principle', but died before his
work became well
known. In the late 1970's Robert Prechter and
A.J. Frost brought
Elliott's work out of obscurity in their book '
Society
behavior trends and reverses in recognizable
patterns. This
principle is
found in market behavior because investors act and
react to transaction
information. The behavior forms repetitive
patterns, and because
the
patterns are repetitive, they have predictive
value. Elliott
identified
thirteen patterns that recur in the markets. He
then assembled
these
patterns or waves into larger versions of the same
patterns.
These became
building blocks to patterns of the next larger size. The
most
basic
pattern is a structure consisting of 5 waves.
Three of the five
waves are
directional and referred to as Trend waves.
These trend waves are
separated by two interruptions that are counter trend
and referred to
as
Retracement waves. Using T for a Trend wave, and
R for a
Retracement
wave, the pattern can be described as T-R-T-R-T.
The classic
pattern is
shown in this theoretical chart. The
three
Trend
waves are labeled 1, 3, and 5. The two
Retracement waves are
labeled 2
and 4. Each Trend wave has a 5 sub-wave
structure and each
Retracement
wave has a 3 sub-wave structure. In the
illustration the larger
degree
wave is labeled with the large red
numbers. The Trend waves
to
labels Basic Elliott Wave
Principles:
Fairly
often, a
retracement wave retraces a Fibonacci percentage of
the preceding
wave.
Sharp corrections often retrace 61.8% or 50%.
Sideways
corrections often
retrace 38.2%, particularly in wave 4. Most
analysts focus on
Retracement
waves and measuring wave heights to forecast a price
objective using
Fibonacci
ratios. Tip: Use Fibonacci principles to
forecast a price, and
use
Elliott principles to determine when a wave is mature
or
finished. Look
for correlation of the two. There
will
be
times when market analysis is confusing and the
interpretation is
unclear. My advice is to leave confusing
patterns alone
until
subsequent waves clarify the picture. The best
approach is to
apply
deductive reasoning. Learn Elliott Wave
Principles, rules and
patterns,
and use this knowledge to deduce what will be the
likely course for the
market. A primary purpose of the analysis is the
determination of
whether
a pattern is complete, whether a wave is
finished. If the market
changes
direction as expected, you caught the turn. If
the market
misbehaves,
your conclusion is wrong and money at risk should be
immediately
reclaimed. Tip: Be patient and understand first
where the market
is
at in the unfolding pattern, and then Harmonic Numbers
Harmonic numbers are the "Davinci
Code" of most liquid financial
markets. The numbers are
derived from the Fibonacci summation series
which starts with 0
and adds 1. Each
succeeding number in the series adds the previous two
numbers thus we
have 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 to
infinity. If you divide
55 by 89 you have the golden mean - .618. If you
divide 89 by 55 you have 1.618.
.382
is
the difference of 1.00 - .618 = .382
.618 is the golden mean (phi) and the square root of .382 .786 is the square root of .618 1.27 is the square root of 1.618 - it is also the hypotenuse of a right triangle 1.618 is difference of the square root of 4 minus .382 (2 - .382 = 1.618)
The
Harmonic Edge methodology identifies high
probability
trade setups, then carefully controls
and eliminates risk while still leaving room for profits to accumulate. Copyright©2005-2014 La Canada Capital Management, LLC - All Rights Reserved Terms of Use |