What advantages does the Wave Principle offer to traders?
Here's one of the big advantages of using the Wave Principle when trading: you can increase your understanding of how current price action relates to the market's larger trend.
Other tools fall short in this regard. Several trend-following indicators such as oscillators and sentiment measures have their strong points, yet they generally fail to reveal the maturity of a trend. Moreover, these technical approaches to trading are not as useful in establishing price targets as the Wave Principle. Continue reading "Big Advantages of Trading with the Wave Principle"→
Today we've asked Kenny Mann of Traders day Trading to share his ideas on Elliot Wave Theory and why you should be interested as an investor.
Elliott wave theory suggests that stock market prices tend to ebb and flow in recurring wave like patterns that can enable us to identify high probability trading opportunities. The knowledge gained from recognizing where the market is within one of the wave patterns, can help us to stay in a trade longer so as to maximize profits, whilst also ensuring that we know when to get out, if the market should turn against us.
What is Elliott Wave Theory?
For most people with even a passing interest in stock markets and trading, the name Elliott is usually a very familiar one. Ralph Nelson Elliott was a well respected accountant who through ill health, had a lot of free time on his hands and spent much of it studying the stock market. It was the 1930’s and a particularly interesting time in the markets. Continue reading "What is Elliott Wave Theory and Why Should I Be Interested"→
As with any tool, the Elliott Wave Principle is not the answer to most analysts' problems. It is only a tool, but used properly with other analytical aids, it can greatly enhance the understanding of the overall direction of a market.
The following discussion will be very basic. The primary goal is to give you an understanding of the basic structure or skeleton of a market.
With all due respect to Robert Prechter, I have seen very few other analysts survive almost solely on the Elliott Wave theory. However, having a working knowledge of the principle can prove invaluable when analyzing markets. While I do not purport to be an Elliott Wave expert, I have had success applying many of the basic elements of the principle. In fact, I like to think of myself as an Elliott Wave realist instead of a theorist.
I like to compare the Elliott Wave theory to an outline one might use to present a speech; it provides a general format to follow without having the text etched in stone. The primary pattern for a market consists of a 5-wave rally, as illustrated, followed by a 3- wave downmove, commonly referred to as an a-b-c correction. The 5-wave pattern is referred to as an impulse wave which means a wave in the direction of the prevailing trend.
The primary 5-wave structure may be subdivided into smaller 5-wave patterns, creating smaller impulse waves followed by a-b- c corrections. Note after these waves combine to create a 5-wave move, a larger a-b-c correction forms. The a-wave is shown in this example as a 5-count pattern, indicating this is the direction of the near-term trend and only the first part of a larger degree corrective move. Be aware that an a-wave may or may not be a 5- count wave but that a c-wave invariably will contain 5 swings.
Also take note that the a-b-c corrections ideally return to the area of the previous fourth wave. This may be followed by a new impusle wave or by a congestion or sideways pattern.
For an in-depth discussion of the Elliott Wave theory, I suggest you get the book Elliott Wave Principle, by Frost and Prechter. This book should be part of any serious technician's library.
<h2>Basic wave extension</h2>
As with any theory, reality proves variations of the ideal pattern will occur. The primary variation of an impulse is an extension.
An extended wave generally is an elongated or protracted wave within the 5-count basic wave. Extra swings develop which commonly appear to be individual primary waves but actually form a single impulse wave. The wave extensions are generally larger than the minor degree swings within a primary wave but often are not as large or clearly denned as the primary waves.
At times, the extended waves are difficult to distinguish from the primary waves, giving the appearance of a 9-wave structure. The extension is undefined, which is not critical since a 9-wave structure is an extended 5-wave pattern and holds the same level of importance. When dealing with an undefined extension, I have found the subsequent a-b-c correction often terminates in the area of wave 6 (see arrow) instead of the normal area of wave 4.
While the extra swings or extensions may occur within the first or fifth wave, the most common location is within a third wave. Extensions are common, especially in bull markets; generally an extension should be expected to occur in one of the three primary impulse waves. However, extensions normally occur in only one primary wave.
Once an extension has occurred, you can expect the subsequent wave(s) to be easy to identify 5-wave patterns. If the first two impulse waves form without exhibiting an extension, the final wave can be expected to contain an extension; if the first two impulse waves are of similar length as well, the last has the potential to be explosive. Explosive fifth waves may contain extensions within extensions.
For an in-depth discus sion of extended waves, lmpulae read Chapter 1 of Elliott Wave Principle by Frost and Prechter.