Elliot Wave Theory represents the known Dow theory, and this theory can be applied to any type of current assets, commodities, stocks, oil, gold and others. The theory was proposed by the accountant and business expert Ralph Nelson Elliott in his study entitled “The Wave Principle” published in 1938.
Elliott began monitoring plans and stock markets in the hope of understanding the behavior of a price, and then pointed out that the market, being the result of psychological control of the majority of the participants in the market, they follow certain laws.
Elliott wave theory is mainly based on the periodic laws in psychology concerned with human behavior.According to Elliott, it can be observed behavior of prices in the market clearly as shown in the chart below (Figure 1). Elliott Wave Theory states that prices always either in the case of emerging markets or in the case of falling markets, and these cases represent the two main phases of prices according to Elliott theory
Elliott also proposed the division of all price movements in the markets to: – five waves (waves 1 to 5) that move with the three corrective waves (waves A, B, C)
Waves are divided into: – rashes, and is causing constitute trends (ascending or descending) and prices move very actively (waves 1, 3, 5 and А, С in Fig. 1). – Corrections (reflections) and that are characterized by the opposite movement. (Waves 2, 4 and В in Figure 1)
Elliott was based on this theory on the principle of the division of the waves, in the sense that each wave is part of the longest wave, and is at the same time several divided waves are smaller. Each wave is divided into 3 or 5 waves. This division depends on the direction of the larger wave.
The main principle in the Elliott theory is that all waves rush Qsberh composed of five waves, and each made up of three wave corrective waves, which can also be seen in the figure. For example, in Figure 1. Wave 2 is composed of 5 shorter wavelengths because it is what creates the impulse wave that direction.The longest cycle, according to Elliott, called PAL Super-cycle, and is composed of 8 Super-cycle also waves. Each of which consists of eight sessions, each of which is composed of several other courses. And in this way you can easily identify the driving waves and corrective waves and relativity Note: whenever they are driving the movement stronger, the corrective movement stronger, and vice versa.
Elliott Wave criticized the lack of a clear definition of the beginning or the end of the wave theory. It is worth mentioning here that the identification of correction waves in this context may be very difficult Ecot
Elliott waves and Fibonacci numbers theory
Fibonacci series provides a computational basis for the Elliott Wave Theory, where Fibonacci numbers play an important role in building a full market cycle as described in the Elliot Wave Theory. Each session of the Elliott courses consisting of the total wavelengths that fall within the Fibonacci numerical sequence.Usually use this principle in the Elliott Wave Theory as follows: movement in a certain direction should continue until it reaches the stage of compatibility with the Fibonacci numerical sequence.
For example, if prices did not change direction during 3 days, this change should not occur until the fifth day starts. Similarly, should the trend continue for up to eight days if the trend within five days has not changed, and so on. And this is the basic pattern of how to calculate the trend movements whatever the user scheme, daily, weekly, monthly or otherwise. However, this is only the “ideal model” theory, where it can not predict the behavior of prices that accurately every time. In fact, Elliott noted that deviations can occur in all of the time or wave power even after the wave occurs, and that individual waves barely evolve in the same normal form of these waves.
The properties of waves
Price waves in this theory account is similar to the road map. Each wave a set of characteristics that are based on the behavior constitutes a major Almcharkyin in the market. Particular attention was given to describe the individual situation of each wave in the Elliott wave theory, besides, there are some laws used relative to the formations of Elliott waves. These laws can help in the definition and for the beginning of the wave length, and lengths are measured these waves from top to bottom as a percentage of the main wave.
The relationship between the waves
– Wave 1: and when they are «market psychology» in an upward trend (bearish) in practice, and the news is still positive (negative). As a general rule, this wave represents either a jump or a strong change in direction or penetrate the resistance level (support) essential, and in Aside from that, the price action is important and ever be in the form of mild fluctuations.
– Wave 2: and when prices are moving rapidly away from the level achieved with great difficulty in the first wave. Prices could fall to almost 100% of the first wave movement, but without penetrating the beginning level. Usually this wave form correction of 60% from the first wave with a relative stability in prices.
– Wave 3: and is the most important wave of followers of Elliott waves. Before the beginning of the wave, it can be seen growing investor optimism the continuity of the current trend (the first wave) and price stability when testing this trend levels (support or resistance). Prices start to move with the increase in the trading volume for the longer shaped by Elliott Wave Theory, and is usually equal to 1.618 weakness of the first wave.
– Wave 4: and is the most difficult in terms of specifically because they are usually equal to 38% of the third wave and usually have the depth and length of this wave is relatively small. This wave is characterized by the positive control that the same trend continues to prevail. Shall not exceed the fourth wave beginning of the second wave, but at the end of the session of five waves or at the edge of the triangles.
– Wave 5: Usually this wave is determined by using the deviations momentum index, as prices are still in the same direction with the trading volume has declined for the disproportionate level with the level of prices. Usually it reflects the price trend is strong at the end of this wave.
– Wave A: touted as if the opposite direction of the main wave, and are fully reflect the general mood of the wave correction opposite the main direction. It is very similar to the first wave, but it will not penetrate the level achieved at the end of the fourth wave of the movement of the previous impulse.
– Wave B: resemble often the fourth wave and is also very difficult when you identify them, but they will not penetrate Straightener investigator at the end of the fifth wave of the movement of the previous impulse.
– Wave C: a strong wave correction up to convincing levels to follow the general trend or the beginning of a new direction. This wave is characterized by extreme caution when traders and is characterized by high momentum. Usually five mini-waves are formed in this wave to reach its extension to 1.618 times the third wave.
Unfortunately, has been the development of Elliott waves on the old model and the financial markets is actually the reason that the practical use of the theory is often difficult and requires special knowledge.