Analytical Methods

Elliott Wave Analysis

The analysis of price charts and the forms of price movements over time is my most-used analytical technique. I often use other techniques to choose which trades to consider, but the final decision is always based on an Elliott wave analysis of the chart.

Elliott wave analysis was developed in the 1930s and 1940s by a Kansas-born New York accountant, Ralph Nelson Elliott. His methods had some popularity at the time, and then faded, only to be revived in the 1970s by a New York market technical analyst, Robert Prechter.

His Georgia-based company, Elliott Wave International, has grown to be the leading analytical house based on Elliott wave theory. They make available a number of free educational materials and other resources, in addition to their for-pay subscriptions.

It is important, up front, to understand what Elliott wave analysis does, and what it doesn’t do. Elliott provides a context for the chart that shows what future price movements are possible or likely. It is not a crystal ball that will reveal what the future course of the market will be.

Learning about Elliott wave analysis. I recommend two books, both by people associated with EWI.

First, Elliott Wave Principle by Robert Prechter and A.J. Frost is the book that, along with Prechter’s analyses, that created the revival of Elliott wave theory. I first read it in 1984, and it has had a profound influenced on my thinking about markets ever since.

Second, I’ve found Visual Guide to Elliott Wave Trading by Wayne Gorman and Jeffrey Kennedy, both of EWI, to be a useful book that relates Elliott wave theory to practical trading. The authors are hands-on Elliotticians, and for an active trader, that’s exactly what’s needed — less theory and more how-to. The first chapter of the book gives a very nice thumbnail run down of what Elliott wave theory is all about.

Terminology. Here are some links to information about some of the technical jargon I use.

Charts. On my charts, waves have a subscript showing the degree above or below the Intermediate degree. Here are the subscripts and the degree each represents:

  • {+3} Supercycle
  • {+2} Cycle
  • {+1} Primary
  • No subscript: Intermediate
  • {-1} Minor
  • {-2} Minute
  • {-3} Minuette
  • {-4} Subminuette
  • {-5} Micro
  • {-6} Submicro
  • {-7} Minuscule
  • {-8} Subminuscule
  • {-9} Bitsy
  • {-10} Subbitsy

I have found the study of Elliott wave analysis to be a rewarding one. It has often kept me from entering bad trades, it provides discipline that enforces a degree of caution, and — quite frankly — it’s fun. Forget artificial intelligence. The human eyes and brain in combination are the finest pattern recognition system around. Our built-in skills put AI to shame, and I find it enjoyable to give that system some exercise each morning when I do my analysis.