Introduction To Elliott Wave Analysis}

Submitted by: Sylvain Vervoort

In my opinion, one of the only tools that can give you an idea as to which direction the stock price will move next is Elliott wave analysis. With short, medium, and long-term Elliott wave trend analysis, you can have a pretty good indication if price has a better chance of going up or going down in these different time periods. As an added bonus, an Elliott wave can give you some price targets too. I think that your Elliott wave count does not have to be perfect. Most probably you will have to review counts regularly. What is important, though, is that price makes a move in the expected up or down direction.

During an illness in the mid-1930s, Ralph Nelson Elliott discovered the correlation between human emotion and trend patterns contained within price charts. Elliott discovered different patterns that repeated themselves in form but not necessarily in size or length of time; these patterns could always be subdivided into smaller waves within the framework of certain rules. He called this phenomenon the wave principle.

There are two basic waves in the Elliott wave theory: a five-wave impulse pattern in the direction of the main trend and a three-wave correction pattern against the main trend. In a later stage, Elliott used Fibonacci numbers together with the waves to predict price targets. A trend signals the main direction in which prices are moving; corrections move either against the main trend or sideways. In Elliott wave terminology, these are called impulse waves and correction waves. The correction wave consists of three waves: A, B, and C.

Impulse waves are identified by numbers; correction waves are identified by letters. Impulse waves 1, 3, and 5 move in the direction of the trend and therefore, consist of another impulse wave of a lower degree. Impulse waves 2 and 4 move against the trend and are as such correction waves of a lower degree.

We know already that the up trending or down trending correction wave has three waves. Waves A and C point in the direction of the correction trend; wave B is moving against this direction. Waves A and C in a correction wave moving in the direction of the correction trend are therefore impulse waves, consisting of five waves. Note that waves 2 and 4 in an impulse wave are also correction waves.

Another possible correction pattern is a triangle correction. A triangle correction consists of five correction waves. IMPORTANT! A triangle correction is always part of an ABC correction wave.

Any impulse wave can be interpreted as a correction wave, but it is, of course, wrong to do this because the Elliot wave count will be completely wrong. Respecting all the rules is therefore utmost important.

An impulse wave and a correction wave together make a cycle. An example indication could be:

The biggest wave:[1] to [2] consist of 1 + 1 = 2 waves

The biggest subdivision: (1) to (C) consist of 5 + 3 = 8 waves

The next subdivision:1 to capital C consist of 21 + 13 = 34 waves

The following subdivision:Roman I to small c consist of 89 + 55 = 144 waves

This subdivision is not limited.

A typical up impulse wave [1] to [5], with an extension of a lower degree wave (1) to (5) in wave [3] can have for example another extension of a lower degree with waves 1 to 5. From the start of the main impulse wave [3] up, you could look for a long trade and stay in the trade based on the Elliott wave count until wave [5] is confirmed above the wave [3]. Nice profits can be obtained thanks to the fact that you stay in the trade based on the Elliott wave count.

With a top [5] confirmed, which is actually a new longer term wave 1 of a higher degree, you are expecting a correction wave 2 for this longer term up move. Most probably an ideal moment to start a short position while expecting a medium term ABC zigzag correction. This correction wave can also be a double zigzag correction with waves WXY, with lower degree ABC waves in the W and Y waves.

This is the end of my introduction to Elliott waves. Next article we will look at the basic impulse wave’s rules and price targets.

About the Author: Want to learn everything about technical analysis? You can find free articles at my website:

stocata.org/

. Sylvain Vervoort is a trader and the author of a new book Capturing Profit with Technical Analysis and a regular contributor to Stocks & Commodities magazine.

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