ELLIOTT WAVE BASICS
INTRODUCTION
Elliott Wave Theory was developed by R.N. Elliott and
popularized by Robert Prechter. This theory asserts that crowd behavior ebbs
and flows in clear trends. Based on this ebb and flow, Elliott identified a
certain structure to price movements in the financial markets. The article
serves as a basic introduction to Elliott Wave Theory. A basic 5-wave impulse
sequence and 3-wave corrective sequence are explained. While Elliott Wave
Theory gets much more complicated than this 5-3 combination, this article will
only focus on the very basics.
The labeling convention shown above is a hybrid between
that shown in the Elliott Wave book and the Elliott tools from SharpCharts. In
Elliott-speak, this labeling convention is used to identify the degree or level
of the wave, which represents the size of the underlying trend. The upper case
Roman numerals represent the large degree waves, the simple numbers represent
the medium degree waves and the small-case Roman numerals represent the small
degree waves. The trends start with the largest degree (Grand Supercycle) and
work their way down to waves of lesser degree. For example, the Cycle wave is
one larger degree than the Primary wave. Conversely, the Primary wave is one
lesser degree than the Cycle wave. Wave 1 of (1) would indicate that Wave 1 is
part of a larger degree Wave (1). Wave 1 is a lesser degree than Wave (1).
In reality, most chartists will only use 1 to 3 wave
degrees on their charts. It can get quite complicated trying to apply nine Wave
degrees or even just using the labeling convention in the order provided.
Chartists using 1 to 3 wave degrees can simply label the highest degree waves
with upper case Roman numerals (I,II,III,IV,V,a,b,c), the middle degree waves
with numbers (1,2,3,4,5,A,B,C) and the lowest degree waves with lower case
Roman numerals (i,ii,iii,iv,v,a.b,c). This provides three distinct groups for
labeling various waves.
(to be contd)
No comments:
Post a Comment