Elliott Waves

Theory
Ralph Elliott (1871–1948) was an accountant, who developed a stock market theory based on symmetrical price cycles. He published his wave theory in two books (1938 & 1946) and believed that Man and the Universe are subject to cyclical processes which can be calculated and projected  with certainty far into the future. His work was popularised by Robert Prechter who revised it in his own book called “The Elliott Wave Principle.”

The basis of the theory is that prices advance in three upwaves, followed by two downwaves. The downwave is steeper and of shorter duration than the upwave. These waves are always symmetrical and can be seen in all timeframes.

1. Grand Supercycle - 100-200 years
2. Supercycle -  40-70 years
3. Cycle - 1- 5 years
4. Primary - 3 months to 2 years
5. Intermediate - weeks/months
6. Minor - weeks
7. Minute - days
8. Minuette - hours
9. Sub-minuette - minutes

Trading Strategy

Trading signals are derived from the price chart. Buy the start of the upward or impulse wave. Sell at the third peak of the upwave. Buy again at the lowest point of the downwave. The hardest part of the theory is to determine and measure the waves accurately - because, in reality, waves can be shortened or extended by strength and weakness in the share price. To manage these issues, the theory contains about 11 exceptions.  In practice, it is very hard to determine peaks and troughs in a timely manner because you cannot forecast accurately if an exception is going to occur or not.

How to buy shares with technical analysis

Technical Analysis theory is based on the premise that the share price reflects all available information about a company and its future prospects - with rising prices signifying high demand and vice versa. Therefore a technical analyst only has to refer to a price chart to determine whether a stock should be bought or sold. They believe share prices form regular patterns and trends. There are many technical analysis systems - each claiming to offer the best method to buy and sell shares. On this page you’ll see some of the most popular technical analysis methods:

• Chart patterns
• Elliott waves
• Indicators
• Japanese candlesticks
• Volume analysis

Log charts

Share prices are usually drawn as a “log chart.” Price is plotted on the Y-axis with a logarithmic scale and Time is plotted on a linear X-axis. Log charts compress the price scale of low and high prices uniformly. This makes it easy to compare price percentage differences. Thus a 10% (5p)  rise at 50p will trace the same physical distance as a 10% (25p) rise at 250p.

  More technical analysis methods are listed below.

Chart Patterns

Theory

Share prices often display repetitive trends and patterns. After a strong move upwards, prices often move sideways - termed a “consolidation area,” before peaking or “topping.” Next prices decline until they form a low point or “bottom pattern.” Chart patterns are hard to use because you don’t know if a single bottom is going to turn into a double or triple bottom, or consolidation area.

Trading Strategy

Trading signals are derived from a log price chart. The trading plan is to buy at the low point of a bottoming pattern and sell at the high point of a topping pattern. Another strategy involves the consolidation area - To buy when the price rises from upper boundary (termed resistance) and vice versa to sell.

An Elliott Wave comprises 3 upwaves and two downwaves.