Timing Solutions for Swing Traders: A Novel Approach to Successful Trading Using Technical Analysis and Financial Astrology

CHAPTER 4

Elliott Waves

Elliott Waves serve as a road map to understanding the state of the market. The most difficult aspects of learning Elliott Waves are the labeling of the first count, where to expect the likely levels, and where to begin the next count. In counting Elliott Waves, the most common difficulties are found in complex correction and identifying the beginning of Wave C, and in completion of an A-B-C pattern. Under certain market conditions, wave analysis can become extremely ambiguous and very hard to decipher. But when the count is right, it can be most thrilling.

The Elliott Wave Principle was first presented to the investment world in 1938 by Ralph N. Elliott. His theory is based on the premise that market prices are a reflection of crowd behavior. Each wave of price movement represents a series of emotional reactions by investors, which have certain repetitive patterns and cycles.

Elliott considered Fibonacci ratios to be the most important factors in determining the extent of price movements, including the time movements in any market. Fibonacci numbers are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, and so forth. Each number in the sequence is the sum of the previous two numbers. A Fibonacci ratio is the ratio between any successive numbers of the sequence. Elliott saw that markets moved in waves that corresponded to Fibonacci numbers—in series of five up waves and three down waves. The five up waves and the three down waves, totaling eight waves, ...