Theory of the waves of Elliott

The theory

The theory of the waves of Elliott is a theory of the walk of the financial Marché S. It is directly inspired by that of Dow. The starting point of this theory is that the market evolution is done by a series of successive waves, and this, some is the scale of observation of this market (of the minute to very the long run). One speaks then about process fractal.

A market thus evolves/moves in eight successive vaguenesses. Let us take the case the case of a Marché bull (fig.1). Wave 1 is a wave of rise, wave 2 corrects this wave, wave 3 is a new phase of rise which is again corrected by wave 4 and wave 5 is a last period of progression of the courses. This movement overall bull is followed of a series of three waves: the vague one has which cause a drop in the courses, the vague B which represents a renewal with the rise and vague C, last period depression.

In the case of a market bear (fig.2), wave 1 is a wave of depression, wave 2 corrects this wave, wave 3 is a new phase of fall which is again corrected by wave 4 and wave 5 is a last period of regression of the courses. This movement overall bull is followed of a series of three waves: the vague one has which makes assemble the courses, the vague B which represents a renewal with the fall and has vague C, last period bull.

Fig.1

Fig.2

Of course, work of Elliott and their developments posterior are not limited to a simple peremptory assertion of this situation but state precise rules concerning the personality, the shape and the size of the various waves.

Rules

Personality of the waves

The influence of the theory of Charles Dow is determining here. Elliott is inspired some and supplements it to define the personality of the waves, in particular that of correction. Prechter will go even further since it will justify the existence of these waves by the psychology of the various types of speakers on the market.

Wave 1

Waves 1 are difficult to recognize since they can be interpreted like simple corrections belonging to the preceding market. They are generally very short and rapid. It frequently happens that one cannot break up the 1 qu wave ' into three waves and not into 5. This wave is the wave of “astute” according to the theory of Dow which considered that those had access to information before the others. One can as say as it is the wave of opposing which buys when the market drops and sell when it goes up.

Wave 2

It generally corrects the first considerable wave of way and often involve to think that the preceding movement is not finished yet (fine of vagueness C). Waves 2 which correct waves 1 completely are not rare things: a configuration in double bottom is observed then if it is acted of a movement bull or as double signal in the case of a movement bear.

Wave 3

It is the wave of the “follower”. It is the principal vagueness of the movement. An elementary rule to retain concerning this type of vagueness is that it is never shortest among the waves of impulse which are waves 1,3 and 5. In fact waves generally know extensions and which are accompanied by very strong volumes.

Wave 4

It is a wave much less violent than wave 2. It comes to consolidate the market. According to the principle of alternation (cf will infra), this wave is thus often complex: structure in several waves and often in triangle. A rule to be retained: a wave 4 will never break the level reached by the market at the end of the vagueness 1.

Wave 5

It is the wave of the small carriers. It is generally not very dynamic but it lasts long enough. It is the last phase of a movement: end of the euphoria for the movements bulls and despair for the movements bears. At the end of the vagueness 5, one notes a fall of volumes and sometimes a wave 5 which does not exceed the signal or the bottom (according to whether the market is bull or bear) wave 3.

The vague one has

They are sometimes regarded technical corrections and not as the beginning of the end of the movement.

Vague B

They find sometimes the signal (case of a movement bull) of vagueness 5 to form a double-signal.

Vague C

They come to close the sequence of eight vaguenesses of the theory of Elliott. In fact waves resemble waves 3 in width. Their similarities lead besides to frequent confusions: is one in a market truly bear or a simple phase of correction?

Category: Economic theory Category: Theory

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