7/7/2011 – Using Elliott Waves: As Simple As A-B-C

To use the Wave Principle as you analyze the markets, you need
a basic understanding of the Elliott method — the rules and
guidelines, the literal shape of individual waves, even when
the larger trend may turn.

To get you started, we’ve included an excerpt from the free
Elliott Wave Tutorial, adapted from Elliott Wave Principle by
Frost and Prechter,
and a short video clip from the live presentation, Tips from
a Pro.

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Here is your quick lesson excerpted from The Elliott Wave Tutorial:

In his 1938 book, The Wave Principle, and again in
a series of articles published in 1939 by Financial World magazine,
R.N. Elliott pointed out that the stock market unfolds according
to a basic rhythm or pattern of five waves up and three waves
down to form a complete cycle of eight waves. The pattern of
five waves up followed by three waves down is depicted in Figure
1-2.

One complete cycle consisting of eight waves, then, is made
up of two distinct phases, the motive phase (also called a “five”),
whose subwaves are denoted by numbers, and the corrective phase
(also called a “three”), whose subwaves are denoted
by letters. The sequence a, b, c corrects the sequence 1, 2,
3, 4, 5 in Figure 1-2.

At the terminus of the eight-wave cycle shown in Figure 1-2
begins a second similar cycle of five upward waves followed
by three downward waves. A third advance then develops, also
consisting of five waves up. This third advance completes a
five wave movement of one degree larger than the waves of which
it is composed. The result is as shown in Figure 1-3 up to
the peak labeled (5).

At the peak of wave (5) begins a down movement of correspondingly
larger degree, composed once again of three waves. These three
larger waves down “correct” the entire movement of
five larger waves up. The result is another complete, yet larger,
cycle, as shown in Figure 1-3. As Figure 1-3 illustrates, then, each
same-direction component of a motive wave, and each full-cycle
component (i.e., waves 1 + 2, or waves 3 + 4) of
a cycle, is a smaller version of itself.

Every wave serves
one of two functions: action or reaction.
Specifically, a wave may either advance the cause of the wave
of one larger degree or interrupt it. The function of a
wave is determined by its relative direction.
An actionary or trend wave is any wave that
trends in the same direction
as the wave of one larger degree of which it is a part. A reactionary or countertrend wave
is any wave that trends in the direction opposite to
that of the wave of one larger degree of which it is part.
Actionary waves are labeled with odd numbers
and letters. Reactionary waves are labeled with even numbers
and letters.

Watch this video clip from Tips from a Pro for more
on Elliott waves:

EWI’s Chief Currency Strategist Jim Martens explains how learning
to use Elliott waves can be as simple as counting to 5 and knowing
your A-B-Cs.