"The Wave Principle" is Ralph Nelson Elliott's discovery that
social, or crowd, behavior trends and reverses in recognizable patterns. Using stock market data as his
main research tool, Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature.
From this discovery, he developed a rational system of market analysis. Elliott isolated thirteen patterns of
movement, or "waves," that recur in market price data and
are repetitive in form, but are not necessarily repetitive in time or
The Elliott Wave Principle
When investors first discover the Wave Principle, they're often most impressed by its ability to predict where a market will head next. And it is impressive. But its real power
doesn't end there. The Wave Principle also gives you a method for identifying at what points a market is most likely to turn. And that, in turn, gives you guidance as to where
you migth enter and exit positions for the highest probability of success. At its most basic level, wave analysis is simply the identification of patterns in market prices.
The idea that market prices are patterned was intensely controversial just a few years ago. But no longer.
Recent discoveries have confirmed that patterns exist in many natural systems even systems that previously appeared to be random. Examples include the weather, botany,
geography and even human physiology. Generally, these systems unfold in patterns of "punctuated growth" - that is, periods of alternating rowth and non-growth, or even
decline. The patterns then build on themselves to form similar designs at a larger size, then the next size up, and so on. This emerging science is called "fractal geometry."
It is one of the most exciting branches of Chaos Theory. And it is precisely the model identified by R.N.Elliott some 60 years ago in the financial markets.
The Elliott Wave Principle
The Elliott Wave Principle is a detailed description of how markets behave. The description reveals that mass investor psychology swings from pessimism to optimism and
back in a natural sequence, reating specific patterns in price movement. Each pattern has implications regarding the position of the market within its overall progression, past,
present and future. The purpose of this publication and its associated services is to outline the progress of markets in terms of the Elliott Wave Principle and to educate
interested parties in the successful application of the Elliott Wave Principle. This is probably the most comprehensive trading education on how to project high probability time
and price targets based on Elliott Wave pattern structure.Under the Wave Principle, every market decision is both produced by meaningful information and produces meaningful
information. Each transaction, while at once an effect, enters the fabric of the market and, by communicating transactional data to investors, joins the chain of causes of others'
behavior. This feedback loop is governed by man's social nature, and since he has such a nature, the process generates forms.
As the forms are repetitive, they have predictive value. Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what
most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the linear causality to which one becomes accustomed
in the everyday experiences of life. Nor is the market the cyclically rhythmic machine that some declare it to be. Nevertheless, its movement reflects a structured formal progression.
That progression unfolds in waves. Waves are patterns of directional movement. More specifically, a wave is any one of the patterns that naturally occur under the Wave Principle.
The Wave Principle
is unparalleled in providing an overall perspective on the position of the market most of the time. Most important to
individuals, portfolio managers
and investment corporations
is that the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or
Living in harmony with
those trends can make the difference between success and failure in financial affairs.
Despite the fact that many analysts do not treat it as such, the Wave Principle is by all means an objective study, or as Collins put it, "a disciplined form of technical analysis."
Bolton used to say that one of the hardest things he had to learn was to believe what he saw. If the analyst does not believe what he sees, he is likely to read into his analysis what he thinks
should be there for some other reason. At this point, his count becomes subjective. Subjective analysis is dangerous and destroys the value of any market approach. What the Wave Principle
provides is an objective means of assessing the relative probabilities of possible future paths for the market. At any time, two or more valid wave interpretations are usually acceptable by the
rules of the Wave Principle. The rules are highly specific and keep the number of valid alternatives to a minimum. Among the valid alternatives, the analyst will generally regard as preferred the
interpretation that satisfies the largest number of guidelines, and so on. As a result, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree
on the order of probabilities for various possible outcomes at any particular time. That order can usually be stated with certainty. Let no one assume, however, that certainty about the order of
probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances does the analyst ever know exactly what the market is going to do.
One must understand and accept that even an approach that can identify high odds for a fairly specific outcome will be wrong some of the time. Of course, such a result is a far better performance
than any other approach to market forecasting provides. Using Elliott, it is often possible to make money even when you are in error. For instance, after a minor low that you erroneously consider
of major importance, you may recognize at a higher level that the market is vulnerable again to new lows. A clear-cut three-wave rally following the minor low rather than the necessary five gives
the signal, since a three-wave rally is the sign of an upward correction. Thus, what happens after the turning point often helps confirm or refute the assumed status of the low or high, well in
advance of danger.
Even if the market allows no such graceful exit, the Wave Principle still offers exceptional value. Most other approaches to market analysis, whether fundamental, technical or cyclical, have no
good way of forcing a change of opinion if you are wrong. The Wave Principle, in contrast, provides a built-in objective method for changing your mind. Since Elliott Wave analysis is based upon
price patterns, a pattern identified as having been completed is either over or it isn't. If the market changes direction, the analyst has caught the turn. If the market moves beyond what the
apparently completed pattern allows, the conclusion is wrong, and any funds at risk can be reclaimed immediately. Investors using the Wave Principle can prepare themselves psychologically
for such outcomes through the continual updating of the second best interpretation, sometimes called the "alternate count."
Because applying the Wave Principle is an exercise in probability, the ongoing maintenance of alternative wave counts is an essential part of investing with it. In the event that the market violates
the expected scenario, the alternate count immediately becomes the investor's new preferred count. If you're thrown by your horse, it's useful to land right atop another. Of course, there are often
times when, despite a rigorous analysis, the question may arise as to how a developing move is to be counted, or perhaps classified as to degree. When there is no clearly preferred interpretation,
the analyst must wait until the count resolves itself, in other words, to "sweep it under the rug until the air clears," as Bolton suggested. Almost always, subsequent moves will clarify the status of
previous waves by revealing their position in the pattern of the next higher degree. When subsequent waves clarify the picture, the probability that a turning point is at hand can suddenly and
excitingly rise to nearly 100%.
Renowned financier Bernard Baruch, who was as close to markets as anyone, saw a connection between economic trends and the herding impulse of animals.
He also understood the crucial importance of that knowledge to a correct social
All economic movements, by their very nature, are motivated by crowd psychology.
Without due recognition of crowd thinking... our theories of economics leave much
to be desired... It has always seemed to me that the periodic madnesses which afflict
mankind must reflect some deeply rooted trait in human nature - a trait akin to the
force that motivates the migration of birds or the rush of lemmings to the
It is a force wholly impalpable.. yet, knowledge of it is necessary to right judgements
on passing events