The Elliott wave theory

The theory of Elliott Waves

The rules of Gann

Ralph Nelson Elliott (1871-1948), an accountant by training, devoted the rest of his life to the study of the movement of financial markets. The theory that bears his name was developed in the late 30s in the US.

To build it, Mr. Elliott based his thinking on the analysis of Dow's movement and was inspired by two characters: Charles Dow, which it regained in part his research on the over the cycle and Leonardo Fibonacci, the Italian mathematician whom he borrowed his theory of the golden ratio.

For Elliott, the assumption was that the course does not evolve haphazardly but just as nature, according to ascendants and descendants harmonious cycles that could be modeled. The analogy of the waves was so all found to describe price movements.

His research, which became the subject of several books in the late 30s stayed long enough in oblivion. The general public and analysts rediscovered the method with the publications of the American Robert Prechter who revived the day in the 80's and that made him a spokesman.

The decaying waves

Markets are changing following the upward and downward cycles, however, even when the movement is bullish correction phases alternate with phases of growth and vice versa when the movement is downward.

Based on this principle Elliott modeled what he calls an "elementary education" consisting of 8 main waves: 3 corrective waves succeed to 5 wave trend.

So this scheme is clearly observed the movement: an upward wave, made it even 5 waves: 1,2,3,4,5 and a corrective wave consists of 3 sub-waves a, b and c.

The special feature of the theory is that this decomposition is almost infinite, each wave can decompose itself in waves of smaller period, and each set of waves that can be a component of a movement of greater magnitude.

 To help us better understand, here is the movement broken down into 34 waves, said "full cycle". 

 

In this diagram, the elementary cycle in 8 waves earlier, has been broken down into 34 waves, each wave 1.2 .. or a, b, c can be decomposed according to the elementary school.

It is noted that if the 1,2,3,4,5 waves logically decompose according to the elementary cycle, there is a reversal to the waves a, b, c. Indeed waves a and c are divided into 5 sub-waves, which makes sense in the theory of Elliott as the cycle develops in the direction of the main trend. The main trend of a, b, c are bearish, the cycle is reversed. We could continue the decomposition of the cycle and lead to a build in 144 waves.

 

Rating principles

In the theory of Elliott, the notation of particular importance. In effect depending on the time period with which decomposes the price movements in waves one will use a specific formalism.

 

There are other notations for smaller or larger units of time, however it is beyond the scope of our study and used the most practical are essentially the breakdowns in days, months or years.

The characteristics of the waves

Each wave has its own personality and its behavior is governed by different rules. These rules are valuable to validate or not a movement.

The pulse wave

 The diagram represents against the default pulse wave, the perfect wave. It is divided into 5 sub waves, rated 1,2,3,4,5.
The first finding is that training generally develops within a channel (symbolized by the red lines) trend, however this is not an absolute rule, specific outputs of the channel can be noticed.
To confirm the formation of such a movement, Elliott asked a number of rules. Concerning the pulse wave rules are two in number and must be followed for the wave to be valid:
1) the bottoming corrective 4, should not be lower than the peak of wave 1. If this were the case then we should look to another formation, we will see that this wave of impulse can take many forms and deviate significantly from the default schema.
2) The wave 3 must not have the lowest amplitude among the three sub pulse waves 1,3 and 5. Besides frequently we see that wave 3 is the one that has the greatest amplitude, as the wave 1 that appears at the end of a downtrend is usually of low amplitude (a rebound after the fall) and relatively short duration.

I will post part 2 and 3 this week. if you wish to read them follow me.

Best regard .@willytrader

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