1. This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn More.

The Elliott Wave Theory Demystified

Discussion in 'Forex Discussions' started by painofhell, Oct 2, 2016.

  1. painofhell

    painofhell Content Contributor

    Jun 24, 2015
    Likes Received:
    I've had many readers ask me whether purchasing a trading system for several hundred or even a few thousand dollars is worth the investment. When I say "trading system," I mean some type of mechanical trading system that usually requires one to be "in the market" (either long or short) all or much of the time--or, some specific trading method a trader has devised and deems profitable. My answer to these readers is: While some trading systems or specific methods may (or may not) be useful or profitable, why not spend that kind of money, or less, and attend a quality trading seminar or workshop.

    Attending a trading seminar or trading workshop allows you to hear some of the best traders and trading educators in the world share their knowledge. Furthermore, the smaller trading workshops allow you to not only learn from the trading instructor, but also likely learn something from your peers who are also attending the workshop.

    I've attended many trading seminars and workshops over the years. My favorite seminars were the Technical Analysis Group (TAG) seminars. I've heard these TAG seminars are no longer conducted--or at least were not conducted this year. These were annual seminars held each fall at some major city in the U.S. The cost of the TAG seminars was around $700 per person. From 15 to 20 of the most respected traders and trading educators in the world gave lectures at the conference. And, attendees got a big fat notebook filled with all the featured speakers' presentations, in case an attendee could not make it to all of them.

    One should never stop striving to learn more about markets and trading. The more knowledge a trader can attain, the better his or her chances for trading success. Last year, my good friend Glen Ring asked me to attend one of his intensive three-day trading workshops. Glen is a trading and trader education master. Glen has taught me much about markets, trading and the psychology of trading. I want to share with you some of the topics the workshop touched upon--without giving away any of the specific trading methods Glen discussed at his workshop.

    Here are a couple "nuggets" we discussed at the workshop that I think will be beneficial to you:

    ---There are several components involved with successful trading. They include spotting the trading opportunity, proper entry and exit strategies and money management. Glen says (and I concur) that the most important of the components I mentioned above are money management and exit strategies. "Anybody can get into the market, but it's the real pros who know when to get out," says Ring. He, too, advocates using fairly tight protective stops when trading futures. He pointed out statistics in our industry that underscore why "survival" in futures trading is so important during a trader's first few months or first couple years of trading. Glen said studies in the futures industry show the average length of time a person stays in the business of trading futures is nine months to one year. What this very likely means is that the vast majority of beginning futures traders start out in this business not using effective money management or protective stops--and end up losing most or all of their trading capital in a few short months. I can't stress enough the survival mentality that all traders--especially those with less experience-need to employ.

    ---At the workshop we also discussed how Elliott Wave Theory can be a valuable trading tool. However, it is complicated and many traders do not master the theory well enough to ever use it effectively. I'll briefly discuss Elliott Wave Theory, but if you want to learn more I'd suggest reading books dedicated to this theory.

    R.N. Elliott discovered the wave theory in the 1930s. Elliott waves describe the basic movement of stock or futures market prices. The principle states that in general there will be five waves in a given direction followed by usually what is termed and A-B-C correction, or three waves in the opposite direction.

    In Wave One, the market makes its initial move upward. This is usually caused by a relatively small number of traders that all of a sudden feel the previous price of the market was cheap and therefore worth buying, causing the price to go up. This is where bottom-pickers come into the market.

    In Wave Two, the market is considered overvalued. At this point enough people who were in the original wave consider the market overvalued and take profits. This causes the market to go down. However, in general the market will not make it to its previous lows before it is considered cheap again and buyers will re-enter the market.

    Wave Three is usually the longest and strongest wave. More traders have found out about the market; more traders want to be long the market and they buy it for a higher and higher price. This wave usually exceeds the tops created at the end of Wave One.

    In Wave Four, traders again take profits because the market is again considered expensive. This wave tends to be weak because there are usually more traders that are still bullish the market, and after some profit taking comes Wave Five.

    Wave Five is the point most traders get long the market, and the market is now mostly driven by emotion. Traders will come up with lots of reasons to buy the market and won't listen to reasons not to buy it. At this point, contrarian thinkers will probably notice the market has very little negative news and start shorting the market. At this point the market becomes the most overpriced.

    At this point in time, the market will move into one of two patterns, either an A-B-C correction or starting over with Wave One. An A-B-C correction is when the market will go down/up/down in preparing for another five-wave cycle.

    I am not an Elliott Wave expert, but I do believe there is merit to the tenets of the theory. Importantly, the tenets of the wave show us how much human psychology plays a part in the way traders trade and the way markets move.

Share This Page