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c01 JWBK195-Saettele May 31, 2008 11:15 Printer: Yet to come
The Argument for a Sentiment-Based Approach 5
exhibit the same patterns, on all time frames. This is known as the El-
liott wave principle, or simply the wave principle. In the 1930s, Ralph Nel-
son Elliott discovered that crowd behavior will trend and countertrend
in recognizable patterns. Although he primarily studied the stock mar-
ket, the wave principle can be applied to any freely traded market. The
size of the FX market makes it a perfect candidate for an analysis tech-
nique based on crowd behavior. You will be amazed at the accuracy
with which you can gauge support and resistance and forecast direc-
tion and the extent of the directional move with knowledge of the wave
Traditional technical indicators such as moving averages and oscilla-
tors aid in identifying the trend but should be used as secondary tools to
sentiment indicators and price patterns. After all, you are trading price, not
The goal of this book is to provide the tools necessary for developing
a top-down, sentiment-based approach to trading and speculation in FX.
I refrain from providing speciﬁcs such as entries or risk control because
these are aspects of trading that everyone will approach differently.
REMINISCENCES OF A STOCK OPERATOR
If there is one trading book that has had a profound impact on me, then
without a doubt that book is Reminiscences of a Stock Operator, written
in 1923 by Edwin Lef
evre. The ﬁctionalized biography of Jesse Livermore
(some say that he actually wrote it), one of Wall Street’s all-time great spec-
ulators, the story is told through the eyes of the ﬁctional Larry Livingston.
(Livermore was the inspiration for Livingston.) Livingston’s experiences
and related commentary ring true to the point that it is hard to believe
that Livermore himself did not write the book. Regardless of who wrote it,
the book is responsible for many of the trading adages that are so common
throughout the trading community. When I hit a trading rut, because of bad
habits or simply ﬂawed thinking, I always go back to Reminiscences for a
reread and it always helps. If you have yet to do so, I strongly recommend
I have compiled a few quotes from the book that I believe capture the
importance of sentiment in trading and speculation.
Market Dynamics Are Timeless
“Another lesson I learned early is that there is nothing new in Wall Street.
There can’t be because speculation is as old as the hills. Whatever hap-
pens ...has happened before and will happen again.”