DOCSLIB.ORG

Trend-Wave Trading Harnessing the Power of the Elliott Wave Principle with the Discipline of Trend Following

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Trend-Wave Trading Harnessing the Power of the Elliott Wave Principle with the Discipline of Trend Following Technical Analysis Trend-Wave Trading Harnessing the Power of the Elliott Wave Principle with the Discipline of Trend Following June 2011 Murray Gunn CFTe Head of Technical Analysis HSBC Bank plc +44 20 7991 6797 [email protected] View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc Disclosures and Disclaimer This report must be read with the disclosures and the analyst ABC certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Global Research1 The Elliott Wave Principle – A Basic Guide 1 Elliott Wave Principle A Fractal Design (5) Ralph Nelson Elliott (3) (B) Price action occurs in regular patterns Long 5 moves (or waves) in the direction of the primary Term 2 (4) 5 (A) trend 2 (1) 3 C 4 2 (C) 3 moves (or waves) when the price action is 1 A 4 correcting against the primary trend 5 1 3 B 1 4 (2) B 5 Repeat at every time frame or fractal Medium 3 Term 3 A 2 1 5 Mass human psychology is patterned C 1 4 5 B (5) Ratio analysis/natural mathematics (Phi, the golden 3 5 (B) 2 2 C ratio, 1.618, Leonardo Fibonacci) 1 4 A C 3 4 2 (3) 1 A 2 5 1 4 4 Elliott heavily influenced by Charles Dow Short B 3 B 1 Term 5 Wave Principle is the purest form of TA 3 A 2 (A) 3 (1) 5 The 1 C 5 4 (C) Full 3 B (4) Putting it all Cycle 1 A 2 together 2 4 C 2 (2) 2 Waves Are Self Similar in FORM… …but they do NOT have to be self similar in TIME or depth (AMPLITUDE) (5) Much more like REALITY 5 (3) 3 1 5 3 B 4 D 4 2 1 E (4) (1) 5 C 3 4 B 2 A 1 A 2 C 3 (2) Elliott’s Wave Principle is technical analysis Elliott heavily influenced by Charles Dow Empirical observations confirmed Dow’s Theory Refined Dow’s work into more detail Price and volume = pure technical analysis Edwards & Magee pattern recognition a derivative of Dow and Elliott 4 Dow Theory • Charles Dow’s editorials in his Wall Street Journal around 1900 • Analysis of price action of the market averages (Dow Industrials, Transports, Utilities) Distribution • Markets have 3 “movements” (value, primary and phase secondary movement). Concept of stock market “value” Source: istockphoto was important to Dow’s analysis. • Trends have 3 phases (accumulation, public participation, distribution) Participation phase Increasing Confirmed end of bull volume trend. Previous low point broken. No more higher lows. Accumulation • The stock market discounts all news • Stock market averages must confirm each other. If it’s a Primary bull phase market the Industrials must be making higher highs along with the Transports etc and vice versa. • Trends are confirmed by volume (an uptrend on declining volume is an unconfirmed uptrend) • Trends exist until definitive proof that they have ended (defined by a lower high and a lower low after an uptrend) 5 Distribution from strong Cycles Of Psychology hands to weak hands Mania, euphoria, complacency Relief, hope, Reference: Frost & Prechter “Elliott Wave Principle”, 1978 5 denial, lack of Bubble, speculation, Broad, breadth narrow breadth best destructive B “fundamentals” / 3 decline, news flow “fundamentals” / news flow 3 turn negative Strongest, broadest move, A “fundamentals” / news flow turn Shock, denial, positive 4 “buy the dips” mentality Consternation, impatience 1 C “Fundamentals” Despair, fear / news flow still negative 2 Denial, comfort that Despair, fear bear is back Accumulation by strong hands from weak hands 6 Elliott’s Wave Principle is technical analysis Head & Shoulders = Elliott A B C correction or truncated fifth Flags = Elliott flats Pennant = Elliott triangle Double tops / bottoms = Elliott flat or truncated fifth Rising / Falling Wedge = Elliott ending diagonal 7 The Elliott Wave Principle – A Basic Guide Rules & Guidelines Elliott’s empirical observations led to his conclusion that there were various rules and guidelines that wave formation held to. It is the existence of these rules that makes the Wave Principle relatively objective compared with other forms of market analysis. The rules must be respected. Guidelines point to tendencies. Three (of many) cardinal rules of Elliott’s Wave Principle are: Wave 2 Can Never Retrace More Than 100% Wave 3 Is Never The Shortest Wave Wave 4 Can Never End In The Price Of Wave 1. 5 5 Territory Of Wave 1. 11 3 3 3 3 1 4 1 1 1 4 4 2 2 4 2 2 2 Incorrect 2 Correct Incorrect Correct Incorrect Correct 2nd waves of a motive wave can be very deep but 3rd waves are usually the most powerful. They can be The end of the 4th wave must never overlap the end of wave 1. they cannot move beyond the start of wave 1. shorter than 1 or 5 but they must never be the shortest Note that if wave 4 is a flat or a triangle the first corrective of 1,3 and 5. waves could overlap wave 1 so long as the ending wave does not. Three (of many) guidelines of Elliott’s Wave Principle are: Alternation: Wave 4 Will Usually Be A Different When Wave 3 Is Extended, Waves 1 And 5 Will Wave 4 Usually Terminates Near The Corrective Pattern From Wave 2 Tend To Equality Or A Fibonacci Ratio Previous Wave 4 Of Lesser Degree 5 (3) 5 5 5 5 3 3 3 3 100% 161.8% 3 1 4 1 4 (1) 1 4 1 4 (4) 1 4 100% 100% 2 2 (2) 2 2 2 Zig Zag then Triangle Flat then Zig Zag When wave 3 is extended, wave 5 will tend to end when it equals A 4th wave will tend to finish in the price zone of wave 4 of the the size of wave 1 or a ratio such as 1.618 times the size of wave 1. just ended wave 3. 2nd waves tend to be zig zags and 4th waves tend to be triangles or flats. 8 The Elliott Wave Principle – A Basic Guide (5) (5) (9) 5 (3) 3 (7) Motive Waves 5 1 (3) Motive (or impulse) waves are the trending 3 (5) part of the cycle. These waves are relatively (8) 4 straightforward to identify due to their (3) dynamic, thrusting nature and volume 1 4 (4) 2 normally increases during wave three (1) (6) (4) (1) indicating a market where the participants (1) are motivated to participate. These 2 (4) examples show bull market motive waves. Bear market motive waves are simply the (2) reverse. (2) (2) Extensions Extension (Nine Wave) Ending Diagonal Extensions occur when one of the motive waves Quite rarely an extension will occur where Also known as a rising or falling wedge, the ending is prolonged and subdivides into amplified each subdivided wave is of roughly equal diagonal is a 5th wave that can subdivide into five waves. Frequently occurring in the wave 3 amplitude. This results in the entire motive overlapping waves of 3 waves each (zigzags). It is a position, normally only one wave within a motive wave looking like a nine wave move. sign of an exhausted trend. wave will be extended. (5) (5) (5) 5 (3) (5) 3 3 5 (3) (3) 1 (3) 1 4 2 (1) (1) (4) (4) 5 (4) 5 4 3 2 (1) 3 (4) (1) 1 1 4 4 (2) 2 (2) (2) 2 (2) Leading Diagonal Leading Diagonal Expanding Diagonal Truncated Fifth th Added to Ellliott’s original work after The leading diagonal can also subdivide into five A 5 wave that subdivides into fives waves of Sometimes the trend is so exhausted by the time th observations by Frost & Prechter, a diagonal overlapping waves of the normal 5 motive 3 three. The expanding nature of the price action the 5 wave comes that the wave does not even can also occur in the wave 1 position and corrective waves. Divergence between price and points to increasing volatility that can signal the move past the wave 3 top or bottom. It is a sign subdivides into five waves of three moves. oscillators are normal characteristics of diagonals. end of a trend. of a very tired market trend. 9 The Elliott Wave Principle – A Basic Guide (B) Corrective Waves (B) C (B) C 2 2 Elliott observed a number of ways that prices C B 2 A consolidate. Zig Zags and Flats have three wave B movements with the final wave C being an impulse A 2 A 4 4 or motive. The powerful nature of this C wave is a 4 1 1 1 B result of a crowd psychology panicking in either 4 A B B A closing shorts or bailing out of longs. It clears the 1 weak hands out of the market out so that the trend 3 3 C 3 can continue. Triangles on the other hand exhibit C 5 (A) 5 five wave movements. 3 (A) 5 (A) (C) (C) 5 ZigZag (5-3-5)(C) Flat (Regular) (3-3-5) Flat (Expanded) (3-3-5) A sharp correction consisting of two motive A sideways correction where wave (B) Also known as an Irregular Flat, this is a waves (A) and (C) separated by a corrective retraces close to 100% of wave (A) followed sideways correction where wave (B) wave (B). by a motive wave (C) sharp move. retraces more than 100% of wave (A) followed by a motive wave (C) sharp move.
Load more

Recommended publications
  • Charles Dow Desarrolla Lo Que Hoy Se Conoce Como El Dow Jones Industrial Average®
    Hitos 1896 • Charles Dow desarrolla lo que hoy se conoce como el Dow Jones Industrial Average®. 1923 • Standard Statistics Company, antecesora de Standard & Poor’s, desarrolla su primer indicador del mercado accionario con cobertura a 233 empresas. 1926 • Standard Statistics Company lanza al mercado un índice compuesto de precios que incluía 90 acciones. 1941 • Standard Statistics se fusiona con Poor’s Publishing para formar Standard & Poor's. • El indicador del mercado accionario creado en 1923 aumenta su número de compañías de 233 a 416. 1946 • El Dow Jones Industrial Average cumple 50 años. 1957 • Standard & Poor’s publica por primera vez el S&P 500® como un índice de 500 acciones. 1972 • El S&P 500 se convierte en el primer índice bursátil con publicación diaria. 1975 • ExxonMobil se convierte en el primer fondo de pensiones vinculado al S&P 500 y la industria comienza a expandirse. • La calidad institucional llega al mercado general. Vanguard lanza el primer fondo mutuo de índices de consumo, el Vanguard 500, y utiliza el S&P 500 como benchmark. 1982 • CME Group comienza a operar los primeros índices de futuros ―S&P 500 index futures― en la Bolsa de Valores de Chicago (Chicago Mercantile Exchange). 1983 • El Mercado de Opciones de la Bolsa de Chicago (CBOE®) comienza a operar el primer índice de opciones. Estas opciones se basaban en el S&P 500 y el S&P 100. S&P Dow Jones Indices – Hitos 2016 1991 • Standard & Poor’s lanza al mercado el S&P MidCap 400®, el primer índice destacado de títulos de capitalización media en Estados Unidos.
    [Show full text]
  • Results of the S&P Paris-Aligned & Climate Transition (PACT) Indices
    INDEX ANNOUNCEMENT Results of the S&P Paris-Aligned & Climate Transition (PACT) Indices Consultation on Eligibility Requirements and Constraints AMSTERDAM, MAY 18, 2021: S&P Dow Jones Indices (“S&P DJI”) has conducted a consultation with market participants on potential changes to the S&P Paris-Aligned & Climate Transition (PACTTM) Indices. S&P DJI will make changes to the eligibility requirements and optimization constraints used in these indices. The changes are designed to ensure the indices continue to meet their objective, reflect evolving expectations for environmental, social and governance (ESG) business exclusions, while including additional stability to the turnover and stock counts following fluctuations caused by the existing rules. The table below summarizes the changes, and which indices they will impact. Index Family1 Methodology Change CT PA Current Updated Environmental X X CT: Weighted-average S&P DJI CT: Weighted-average S&P DJI ESG Score Score Environmental Score (waE) of the CT Index (waESG) of the CT Index should be ≥ the Constraint to should be ≥ the waE of the eligible universe. eligible waESG of the eligible universe. ESG Score Constraint PA: Weighted-average S&P DJI PA: Weighted-average S&P DJI ESG Score Environmental Score (waE) of the PA Index (waESG) of the PA Index should be ≥ the should be ≥ the waE of the eligible universe waESG of the universe after 20% of the + (20% × (max E score in eligible universe – worst ESG score performing companies by eligible universe’s waE)). count are removed and weight redistributed. Introduce X X No buffer, minimum stock weight lower Minimum stock weight threshold ≥1 buffer rule and threshold of 0.01%, maximum weight of 5%.
    [Show full text]
  • Stock Market Efficiency Withstands Another Challenge: Solving the “Sell in May/Buy After Halloween” Puzzle
    Econ Journal Watch, Volume 1, Number 1, April 2004, pp 29-46. Stock Market Efficiency Withstands another Challenge: Solving the “Sell in May/Buy after Halloween” Puzzle EDWIN D. MABERLY* AND RAYLENE M. PIERCE** A COMMENT ON: BOUMAN, SVEN AND BEN JACOBSEN. 2002. THE HALLOWEEN INDICATOR, ‘SELL IN MAY AND GO AWAY’: ANOTHER PUZZLE. AMERICAN ECONOMIC REVIEW 92(5): 1618-1635. ABSTRACT, KEYWORDS, JEL CODES OVER THE PAST TWENTY YEARS FINANCIAL ECONOMISTS HAVE documented numerous stock return patterns related to calendar time. The list includes patterns related to the month-of-the-year (January effect), day- of-the-week (Monday effect), day-of-the-month (turn-of-the-month effect), and market closures due to exchange holidays (the holiday effect) to name just a few.1 This research is cited as evidence of market inefficiencies (see, * University of Canterbury. Chiristchurch, New Zealand. ** Lincoln University. Canterbury, New Zealand. This paper benefited from editorial comments by Professor Tom Saving of Texas A&M University and encouraging comments by Professor Burton Malkiel of Princeton University. Additionally, constructive comments were provided by an anonymous referee. 1 The January effect is frequently misinterpreted as implying that stock returns, irrespective of market size, are unusually large in January. From Fama (1991, 1586-1587), the January effect refers to the phenomenon that “stock returns, especially returns on small stocks, are on average higher in January than in other months. Moreover, much of the higher January return on small stocks comes on the last trading day in December and the first 5 trading days in January.” 29 EDWIN D.
    [Show full text]
  • Lesson 12 Technical Analysis
    Lesson 12 Technical Analysis Instructor: Rick Phillips 702-575-6666 [email protected] Course Description and Learning Objectives Course Description Learn what technical analysis entails and the various ways to analyze the markets using this type of analysis Lessons and Learning Objectives ▪ Define technical analysis ▪ Explore the history of technical analysis ▪ Examine the accuracy of technical analysis ▪ Compare technical analysis to fundamental analysis ▪ Outline different types of technical studies ▪ Study tools and systems which provide technical analysis 2 What is Technical Analysis Short Description: Using the past to predict the future Long Description: A way to analyze securities price patterns, movements, and trends to extrapolate the ranges of potential future prices 3 History of Technical Analysis The principles of technical analysis are derived from hundreds of years of financial market data. Some aspects of technical analysis began to appear in Amsterdam-based merchant Joseph de la Vega's accounts of the Dutch financial markets in the 17th century. In Asia, technical analysis is said to be a method developed by Homma Munehisa during the early 18th century which evolved into the use of candlestick techniques, and is today a technical analysis charting tool. In the 1920s and 1930s, Richard W. Schabacker published several books which continued the work of Charles Dow and William Peter Hamilton in their books Stock Market Theory and Practice and Technical Market Analysis. In 1948, Robert D. Edwards and John Magee published Technical Analysis of Stock Trends which is widely considered to be one of the seminal works of the discipline. It is exclusively concerned with trend analysis and chart patterns and remains in use to the present.
    [Show full text]
  • The First Stock Index Was Created in 1884 by Publishist Charles Dow As
    TOOLS OF THE TRADE – INDEX FUNDS VS ASSET CLASS FUNDS The first stock index was created in 1884 by publicist Charles Dow as an indicator for investors of how the stock market was performing. Five years later, Dow established the Dow Jones Industrial Average, and in 1923 Standard & Poor’s instituted their first index, the S&P 90 Index. In the years that followed, many more indices were established and began to be utilized as tools, or benchmarks, for investors when evaluating their own portfolios’ performance. An index is simply a collection of investment types held constant, regardless of market conditions, until their governing body deems it appropriate to reconstitute. While useful as a view of the overall market or specific markets, indices themselves could not be bought or sold until the 1970s. The first index funds, established in 1973 by John McQuown and David Booth at Wells Fargo and Rex Sinquefield at American National Bank, were only available to institutional investors. In 1975, John Bogle at Vanguard changed that by establishing the First Index Investment Trust to track the S&P 500 Index and to be marketed to individuals and institutions. Passive investing was born. The fund, deemed “Bogle’s Folly”, was derided by professional money managers as “un- American”. Edward C. Johnson III, Chairman of Fidelity at that time, was quoted as saying “I can’t believe that the great mass of investors are going to be satisfied with just receiving average returns. The name of the game is to be the best.” (source: Bogle Financial markets Research Center, 2006) The fund was later re-named the Vanguard 500 Index Fund and by 2001 had more assets under management than Fidelity’s Magellan Fund.
    [Show full text]
  • Technical Analysis
    ptg TECHNICAL ANALYSIS ptg Download at www.wowebook.com This page intentionally left blank ptg Download at www.wowebook.com TECHNICAL ANALYSIS THE COMPLETE RESOURCE FOR FINANCIAL MARKET TECHNICIANS SECOND EDITION ptg Charles D. Kirkpatrick II, CMT Julie Dahlquist, Ph.D., CMT Download at www.wowebook.com Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jim Boyd Editorial Assistant: Pamela Boland Operations Manager: Gina Kanouse Senior Marketing Manager: Julie Phifer Publicity Manager: Laura Czaja Assistant Marketing Manager: Megan Colvin Cover Designer: Chuti Prasertsith Managing Editor: Kristy Hart Project Editor: Betsy Harris Copy Editor: Karen Annett Proofreader: Kathy Ruiz Indexer: Erika Millen Compositor: Bronkella Publishing Manufacturing Buyer: Dan Uhrig © 2011 by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. For sales outside the U.S., please contact International Sales at [email protected]. ptg Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Printed in the United States of America First Printing November 2010 ISBN-10: 0-13-705944-2 ISBN-13: 978-0-13-705944-7 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education Asia, Ltd.
    [Show full text]
  • Dow Theory for the 21St Century
    Dow Theory for the 21st Century TECHNICAL INDICATORS FOR IMPROVING YOUR INVESTMENT RESULTS Jack Schannep John Wiley & Sons, Inc. ffirs.indd iii 4/25/08 9:51:44 AM ffirs.indd ii 4/25/08 9:51:44 AM Dow Theory for the 21st Century ffirs.indd i 4/25/08 9:51:44 AM ffirs.indd ii 4/25/08 9:51:44 AM Dow Theory for the 21st Century TECHNICAL INDICATORS FOR IMPROVING YOUR INVESTMENT RESULTS Jack Schannep John Wiley & Sons, Inc. ffirs.indd iii 4/25/08 9:51:44 AM Copyright © 2008 by Jack Schannep. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www .copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/ go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose.
    [Show full text]
  • A Long-Term Perspective of the Dow Jones Industrial Average Since
    A long-term perspective of the Dow Jones Industrial Average since 1896 reveals the reality that there are extended periods of time in which the US equity market will trend generally upwards, and also lengthy periods of time where the market will instead stagnate or move generally lower. There have been eight such alternating cycles since 1896, with each averaging 14 years in duration. Let's say an individual begins to accumulate meaningful wealth with which to invest around the age of 40, and has a life expectancy of about 85 years, he or she will likely experience three of these cycles during their investment lifespan. With this in mind, it is important to have at one's disposal strategies that are effective in both generally rising (bull) markets and falling (bear, or "fair") markets. One methodology that has existed since the late-1800's and been proven effective in both kinds of markets is that of the Point & Figure methodology. The first proponent of the methodology was Charles Dow, also the original editor of the Wall Street Journal. Charles Dow was a fundamentalist at heart, yet he appreciated the merits of recording price action and understanding the supply and demand relationship in any investment. The Point & Figure methodology has developed over the past 100+ years, but remains at its core a logical, organized means for recording the supply and demand relationship in any investment vehicle. As both consumers and investors we are innately familiar with the forces of supply and demand; it is after all the first subject introduced in any ECONOMICS 101 class, and we experience its impact regularly in our daily lives.
    [Show full text]
  • A Quantitative Approach to Tactical Asset Allocation
    A Quantitative Approach to Tactical Asset Allocation Mebane T. Faber November 2006, Working Paper ABSTRACT The purpose of this paper is to present a simple quantitative method that improves the risk-adjusted returns across various asset classes. A moving-average timing model is tested in-sample on the United States equity market and out-of-sample on more than twenty additional domestic and foreign markets. The approach is then examined since 1972 in an allocation framework utilizing a combination of diverse and publicly traded asset class indices including the Standard and Poor’s 500 Index (S&P 500), Morgan Stanley Capital International Developed Markets Index (MSCI EAFE), Goldman Sachs Commodity Index (GSCI), National Association of Real Estate Investment Trusts Index (NAREIT), and United States Government 10-Year Treasury Bonds. The empirical results are equity-like returns with bond-like volatility and drawdown, and over thirty consecutive years of positive performance. Mebane T. Faber Managing Director Cambria Investment Management, Inc. 2321 Rosecrans Ave., Suite 4270 El Segundo, CA 90245 E-mail: [email protected] www.cambriainvestments.com 1 Electronic copy of this paper is available at: http://ssrn.com/abstract=962461 INTRODUCTION Many global asset classes in the 20 th Century produced spectacular gains in wealth for individuals who bought and held those assets for generational long holding periods. However, most of the common asset classes experienced painful drawdowns 1, and many investors can recall the 40-80% declines they faced in the aftermath of the global equity market collapse only a few years ago. The unfortunate mathematics of a 75% decline requires an investor to realize a 300% gain just to get back to even.
    [Show full text]
  • Candlestick Technical Trading Strategies: Can They Create Value for Investors?
    Copyright is owned by the Author of the thesis. Permission is given for a copy to be downloaded by an individual for the purpose of research and private study only. The thesis may not be reproduced elsewhere without the permission of the Author. Candlestick Technical Trading Strategies: Can They Create Value for Investors? A Thesis Presented in Fulfilment of the Requirements fo r the Degree of Doctor of Philosophy in Finance at Massey University, Palmerston North, New Zealand. Benjamin Richard Marshall 2005 Abstract This thesis examines the profitability of the oldest known fo rm of technical analysis, candlestick trading strategies. Unlike traditional technical analysis which is based around close prices, these strategies generate buy and sell signals that are based on the relationship between open, high, low and close prices within a day and over consecutive days. Traditional technical analysis, which has been the fo cus of previous academic research, has a long-term fo cus with positions being held fo r months and years. In contrast, candlestick technical analysis has a short-term fo cus with positions being held fo r ten days or less. This difference is significant as surveys of market participants indicate that they place 50 per cent more importance on technical analysis fo r horizons of a week than they do fo r horizons of a year. Candlestick technical analysis was developed on rice data in Japan in the 1700s so the tests in this thesis, using Dow Jones Industrial Index (DHA) component stock data for the 1992 - 2002 period, are clearly out of sample tests.
    [Show full text]
  • Elliott Wave Principle.Pdf.Pdf
    A CAPSULE SUMMARY OF THE WAVE PRINCIPLE The Wave Principle is Ralph Nelson Elliott's discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Using stock market data as his main research tool, Elliott isolated thirteen patterns of movement, or "waves," that recur in market price data. He named, defined and illustrated those patterns. He then described how these structures link together to form larger versions of those same patterns, how those in turn link to form identical patterns of the next larger size, and so on. In a nutshell, then, the Wave Principle is a catalog of price patterns and an explanation of where these forms are likely to occur in the overall path of market development. Pattern Analysis Until a few years ago, the idea that market movements are patterned was highly controversial, but recent scientific discoveries have established that pattern formation is a fundamental characteristic of complex systems, which include financial markets. Some such systems undergo "punctuated growth," that is, periods of growth alternating with phases of non- growth or decline, building fractally into similar patterns of increasing size. This is precisely the type of pattern identified in market movements by R.N. Elliott some sixty years ago. The basic pattern Elliott described consists of impulsive waves (denoted by numbers) and corrective waves (denoted by letters). An impulsive wave is composed of five subwaves and moves in the same direction as the trend of the next larger size. A corrective wave is composed of three subwaves and moves against the trend of the next larger size.
    [Show full text]
  • Basics of Elliott Wave Theory –
    Basics of Elliott Wave Theory – Learn the Essentials In this article we will first cover the Elliott wave basics and structure. The goal of this article is to help you learn Elliott wave theory and give you the foundation to further explore and test the theory. Next, we will take a look at how to apply the theory to day trading. Elliott wave theory is based on the premise that markets form repetitive patterns or cycles. Ralph Nelson Elliott developed the Elliott wave concept of trading in the late 1920’s. The theory proposed an alternative view to the notion that markets are random. Based on this theory, investors could anticipate and predict potential cycles in the market. The most challenging part of Elliott wave analysis is that it’s highly subjective. Where you may see the next bear market starting, another trader will see a double bottom setting in before a massive wave one. This need to quickly assess the pattern in complex markets is what makes the theory so challenging to master. Dow Theory and Elliott Wave The Elliott wave analysis also draws upon the Dow theory. The Dow theory, postulated by Charles Dow also states price moves in waves. Charles Dow called these waves trends. There is a strong influence of the Dow Theory of trends which in Elliott wave trading terminology are nothing more than various degrees of trends. Elliott wave theory goes into great detail regarding the study of the fractal nature of the markets. Now that we have tackled a brief overview, let’s dig into the principles of the theory and key retracement levels which categorize the waves.
    [Show full text]