Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he located copies of R.N. Elliott’s books in the New York Public Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In the late 1970s, gloom was pervasive, but in Elliott Wave Principle, Prechter and Frost called for a roaring bull market akin to that of the 1920s, to be followed by a record bear market. As the stock market rose, knowledge of the Wave Principle among private and professional investors grew dramatically.
When investors and traders first discover the Elliott Wave Principle, there are several reactions:
Disbelief that markets are patterned and largely predictable
Joy at having found a “crystal ball” to foretell the future
And finally the correct, and useful response – “Wow, here is a valuable model I should learn to use.”
Just like any system in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology and the things humans create, such as roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices.
The first step in Elliott wave analysis is to identify patterns in market prices. At their core, wave patterns are simple; there are only two types: “impulse waves,” and “corrective waves.”
Impulse waves are composed of five subwaves (labeled as 1, 2, 3, 4, 5) and move in the same direction as the trend of the next larger size. Impulse waves are so named because they powerfully impel the market.
A corrective wave follows, composed of three subwaves (labeled as a, b, c), and it moves against the trend of the next larger size. Corrective waves accomplish only a partial retracement, or “correction,” of the progress achieved by any preceding impulse wave.
As the figure above shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose subwaves are denoted by numbers, and the three-wave corrective phase, whose subwaves are denoted by letters.
R.N. Elliott was not an ivory tower theorist. He set out to observe and then describe how the market actually behaves. Later he realized that his model had an important theme of self-similarity and a relationship to nature. There are a number of specific variations on the underlying pattern, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable certainties as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is helpful in understanding what a market can do, and at least as important, what it will not do.
Robert
Prechter, Jr., president of Elliott
Wave International, resurrected
the Wave Principle from near obscurity
in 1976 when he located copies
of R.N. Elliott’s books in the
New York Public Library. Robert
Prechter, Jr. and A.J. Frost
published Elliott
Wave Principle in 1978. The
book received enthusiastic reviews
and became a Wall Street bestseller.
In the late 1970s, gloom was pervasive,
but in Elliott Wave Principle, Prechter
and Frost called for a roaring
bull market akin to that of the
1920s, to be followed by a record
bear market. As the stock market
rose, knowledge of the Wave Principle
among private and professional
investors grew dramatically.
When investors and traders first discover the Elliott Wave Principle,
there are several reactions:
patterned and largely predictable
ball” to foretell the future
and useful response – “Wow,
here is a valuable model I
should learn to use.”
Just like any system in nature,
the closer you look at wave patterns,
the more structured complexity
you see. It is structured,
because nature’s patterns
build on themselves, creating similar forms
at progressively larger sizes.
You can see these fractal patterns
in botany, geography, physiology
and the things humans create, such
as roads, residential subdivisions… and – as
recent discoveries have confirmed – in
market prices.
The first step in Elliott wave
analysis is to identify patterns
in market prices. At their core,
wave patterns are simple; there
are only two types: “impulse
waves,” and “corrective
waves.”
Impulse waves are
composed of five subwaves (labeled
as 1, 2, 3, 4, 5) and move in the
same direction as the trend of
the next larger size. Impulse waves
are so named because they powerfully
impel the market.
A corrective wave follows,
composed of three subwaves (labeled
as a, b, c), and it moves against
the trend of the next larger size.
Corrective waves accomplish only
a partial retracement, or “correction,” of
the progress achieved by any preceding impulse
wave.
As the figure above shows,
one complete Elliott wave consists
of eight waves and two phases:
five-wave impulse phase, whose
subwaves are denoted by numbers,
and the three-wave corrective phase,
whose subwaves are denoted by letters.
R.N. Elliott was not an ivory
tower theorist. He set out to observe
and then describe how the market
actually behaves. Later he realized
that his model had an important
theme of self-similarity and a
relationship to nature. There are
a number of specific variations
on the underlying pattern, which
Elliott meticulously described
and illustrated. He also noted
the important fact that each pattern
has identifiable certainties as
well as tendencies. From
these observations, he was able
to formulate numerous rules and
guidelines for proper wave identification.
A thorough knowledge of such details
is helpful in understanding what
a market can do, and at least as
important, what it will not do.
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