- Apr 9, 2018
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The best way to learn any strategy is to start at the beginning! My strategy is built around the Elliott Wave Theory: That’s a near-century-old and proven strategy developed by the great Ralph Nelson Elliott. “R.N.” as he was called, began his career as an accountant and before his big discovery he published two books: Tea Room and Cafeteria Management and The Future of Latin America. After his visit to Central America he contracted an illness that forced him to retire from accounting.
He decided to spend the rest of his life studying the stock market. He started by analyzing huge amounts of market data. He examined 75 years of historical data from the DOW Index – from yearly Images down to half-hour fluctuations. His discovery was amazing. He managed to crack the market code without modern-day technology! You need to keep in mind that back then you needed to print charts by hand, and you didn’t have access to any piece of code that could analyze the market. So everything R.N. Elliott did was manual! In all of the charts he analyzed there were certain patterns that repeated themselves and those same patterns repeated on a larger scale also. Today we know these patterns as “Elliott Waves.” In 1946 Elliott published his final work, Nature’s Law – The Secret of the Universe, where he explained how the market works.
Elliott Wave Theory
Elliott discovered that the market only has two phases that repeat, and you can see them on every single timeframe and in every single instrument. You can view a good illustration of these phases in Image 1. The first phase is called the Motive Phase. This is the part of the cycle that moves in the direction of the larger trend. You will notice on Image 1 that there are five waves labeled with numbers from 1 through 5. The second phase is called the Corrective Phase. This part of the cycle represents pullbacks that happen in the market. Within the corrective phase we find just three waves; labeled with letters A, B, and C. We know that the patterns repeat and repeat, so they link to each other and build the same pattern on the larger scale. The image below depicts an example of this.
Elliott Wave Theory patterns
Now to understand this better, imagine that Image 1 is a move found on the 5 minute chart and that Image 2 represents the movements of the pair on the 15 minute chart. We can advance now to see how these patterns would look on the largest scale.
In Image 3 we can see that we have many waves, however all need only to be counted from 1 to 5 and from A to C. True, you’ll need to learn a few patterns and rules along the way, but I promise it’s not that complicated at all. Let’s move to covering the first phase in the Elliott Wave Theory, The Motive Phase.
The Motive Phase is the first group of patterns we need to learn in our quest to build a perfect trading strategy. In this group we have just four different patterns to learn and most of the patterns a have few things in common. Each pattern from this group will have a five-wave structure, and you can always spot them as they move in the direction of the larger trend. To make it easy, we are going to label each wave from this group with numbers from 1 through 5, just like on Image 1.
Since the market is never going to move in just one direction, we are going to see waves 1, 3 and 5 in the direction of the larger trend and waves 2 and 4 in the opposite direction. This is going to be same for all patterns in the Motive Phase group. For each of the patterns we only need to learn three rules. The rules are going to be the same for most of them, and we will cover this part shortly.
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