Posts Tagged ‘wave analysis’

22.02.2012 Post in Trading

To continue the topic of previous article, we will consider some aspects of wave analysis.

If we look at the chart of currency price changes we will see that there are several types of movement. The chart depicts the phases of descending and ascending movement as well as those of sideways movement. According to the Elliott wave theory, each market stage is a wave, which in turn is a model of crowd’s behavior. As it was mentioned before, a wave can perform the function of action or reaction. The first one moves the market within the general trend, while the second one makes it reverse.

According to the style, waves are subdivided into motive and corrective. Each market cycle is composed of motive and corrective waves. All waves of reverse movement develop in corrective style. Elliott discovered that the motive waves have 5-wave structure, while the corrective waves have 3-wave structure. Therefore, the whole cycle consists of 8 waves. Each wave can be divided into several smaller waves.

wave

The waves can be indentified for every timeframe with the help of more than 10 wave levels. Each of them has its own name and marking. The symbols below were implemented to simplify this procedure:

Triad of symbols for higher wave levels

[1][2][3][4][5][A][B][C][D][E][W][X][Y][Z]

(1)(2)(3)(4)(5)(A)(B)(C)(D)(E)(W)(X)(Y)(Z)

1, 2, 3, 4, 5, A, B, C, D, E, W, X, Y, Z

Triad of symbols for lower wave levels

[i][ii][iii][iv][v][a][b][c][d][e][w][x][y][z]

(i)(ii)(iii)(iv)(v)(a)(b)(c)(d)(e)(w)(x)(y)(z)

i, ii, iii, iv, v, a, b, c, d, e, w, x, y, z

The following rules are used for interpretation of waves:

  1. The turn of the second wave is never equal to 100% upward move of the first wave. For example, at bullish market the second wave low will never be below the beginning of the first wave.

  2. The third wave in impulse sequence is never the shortest. As a rule it is the longest.

  3. The fourth wave never ends in the price range of the first wave, except it forms the chart in a special way: the market movement is the same as it was before, irrespective of its size and movement period.

Analysts often use Elliott wave principles in combination with Fibonacci numbers to calculate the period and size of market movement.

Added by Tatyana Makhina,
InstaForex Clients’ relationship manager

14.02.2012 Post in Trading

elliottRalf Nelson Elliott is an American accountant. He was born in 1871. From the age of 20 he worked in executive positions for railroad companies in Mexico. Later he entered the accounting field and was known as a qualified economist. Elliott took part in international government projects, was appreciated as auditor and consultant. He published several books on business organization, economic and social issues. In 1927 Elliott started successful consulting business.

Unfortunately, by 1929 malignant anemia had left him bedridden. Nevertheless, Elliot remained a man of action and creativity and therefore continued his work despite the serious illness. His studies were focused on stock market. Elliot was influenced by works of Charles Dow and Robert Rhea. Having investigated the equity market, he discovered new unknown patterns of price movement. After the thorough analysis which took him several years, Elliott presented his conclusions to the financial world. When Elliot’s discoveries proved to be practically useful, his articles were published in popular magazines and newsletters. Elliot himself became an analyst whose opinion was considered by biggest investors.

In 1938 appeared the book “The Wave Principle” where he detailed the results of his studies and described his method. His next book entitled “Nature`s Law – The Secret of the Universe” was published in 1946.

We can say that Elliot continued the Dow’s theory of cycles, waves and ripples on ascending and descending market trends. He emphasized the fact that the activity of great mass of people results in price changes regulated by specific laws that can be traced in different fields. Elliot compares them to nature’s laws and gives the examples of the similar patterns in flora and fauna. He stated that crowd behavior has several psychological stages, whether this is a slave rebellion or stock exchange trading. The development of both can be traced on different timeframes (from minutes to centuries). The author describes the peculiarities and signs of changeability for different phases and in what way it is possible to take an advantage of it.

According to the wave principle each market event can be considered as an effect and cause of important information. This interconnection can be explained by social nature of humans. Therefore, this process generates the repeating figures.

volnaAccording to Elliot, waves are the models of directed motion. Each wave has one of two possible functions: action or reaction. Particularly, each wave can stimulate the development of the upper wave or interrupt it. The relative direction of a wave defines its function. As a rule, waves are interchanged according to their length: long-short etc. Each wave can be divided into several short waves. Therefore waves are fractal, i.e. on the same part of the chart we can observe waves of different scale, depending on the timeframe.

We can come to a conclusion that Ralf Nelson Elliot was some sort of romantic scientist, partly philosopher, partly naturalist. His theories are still used by traders, though some of them accuse Elliott in cheating.

Classical wave analysis is quite complicated but the examination of its underlying concepts can be useful to forecast price movements and levels.

Added by Tatyana Makhina,
InstaForex Clients’ relationship manager