Elliott Wave Theory is purely a technical analysis of the marketing trend, innovated idea with fundamental analysis interpretation. The theory is concentrated strictly on the price action, and it explores that price is the ultimate nature of all the analysis giving an end or beginning to all the analysis. Apart from these, the theory concludes that there is always an existing relationship and a similarity in the behavior of liquidity, credit and economic robustness that is often used to examine the current marketing price patterns.
In 1930, an accountant named Ralph Nelson Elliott proposed this Wave Theory. The book “Nature Laws – The Secret of the Universe” included his hypothesis and all the relevant ideas and definitions in 1946. So, till the time the experts and the analysts are treating it as one of the most powerful methods as pseudo-science and you can also deal with the uncertainties of the existing market. It has been seen that some of the academics disregard it but trading experts like Paul Tudor and Robert Prechter are successful at using this method.
It has often been seen some of the marketing trends and the patterns recur in a particular time and this cycling nature of the marketing trend and events with varying frequency, is the principle of the Elliott Wave Theory. It is a relevant hypothesis about the market that the growth phase is quite longer or a recession is exceptionally inhibiting the pattern to such a harsh level. But, it must be accepted that this trading trend will end sooner or later and the existing conditions will be reverted and get into reversal stage.
Trading with the Elliott Wave
In fact, a price pattern is divided into a number of sub-patterns and the trend that is at the lower levels is mainly considered. There is no denying the fact that the Elliott Wave Theory may be applied over any time frame but it is mostly applied in sense of decades or years.
The above Wave Theory examines and divides the current price action into five main phases:
1. Since a few traders are aware of the emerging potential, the trend of the market remains vague.
2. A small correction is done although it does not bring the existing price below the inception point.
3. Being the strongest and powerful phase, it drives many bystanders into current price action.
4. It is nothing but ensues correcting phase.
5. The final stage is the bubbling phases in which huge capital enters the market with a bullish nature and this stage results in a collapse, giving an end to the trend.
It is really a matter of intuition that where will be the beginning or end of any phase. There are no practically accepted methods and the technique may differ from trader to trader who uses different methods to know the current trend of the market. So, if you are incurring losses and often meeting failures as a trader, there are certain useful methods that will try to accommodate your risk tolerance and mental resilience. Interpretation of the Wave Theory may also differ as each of the traders is different in nature and understanding.
One of the most awarding advantages of the Elliott Wave Theory is that it smoothens the price action behavior of the market, keeping the pattern and organization compact. It enhances the precision horizon of the traders, increases their confidence and makes the market pattern hierarchical for better understanding. No doubt, the wave theory gives a great edge over the marketing patterns which are beyond the random behavior of the short-term events pertaining to the market. So, this theory enables you to get a more technical and sophisticated understanding of the marketing trend and trading action without compromising with the implications and the necessities of the market price action.
The arbitrary nature of the Elliott Wave Theory is the greatest loophole. It is really practically impossible to have two analysts on the same charting pattern of the marketing trend and reach on the same conclusions. But, it is certain to have a more complex price pattern which includes many analysts reaching a common consensus.
This is mainly due to the fluid formulation of the theory and intuitive nature. Even if you are placing the dynamic nature of the market into such a sophisticated Wave Theory, it does not guarantee the analyst to get the correct benefits and he is not sure to explain the price fluctuations in the existing market pattern with the reference to the past data. Also, the market may appear cyclical with no underlying causality that is purely based on the visual analysis and market patterns. So, putting this imaginary information into the Wave Theory may give nothing as a consequence rather it will show you a trend in the result that is far from the realistic behavior of the market dynamics and the future is always a vague.
We can examine this theory in a nutshell as a vital tool to air one’s opinions about the market but you are not sure that the real market will just follow the trends as predicted by the theory. No doubt, you can get the correct entry or exit points into the market but one is only successful when he discards the sense of precision and evaluating the data is based on some powerful strategies that has a unique probability.