The creator of wave analysis Ralph Nelson Elliott (1871-1948) at the beginning of his career was engaged in accounting and was highly respected in professional circles. Many companies owed him their success and prosperity.
In the late 1920s, he was forced to completely retire due to a serious illness.
During periods when the disease receded, he analyzed the stock market charts, as the analyst’s sharp mind required work.
Great discovery
The Elliott Wave Principle is not a pure theory. These are empirical observations and the compilation of a catalog of specific models.
Comparing graphs of different time periods and scales, Elliott discovered one feature in the graphic drawing. He noticed that during corrections the curve formed zigzags. After that, the price continued to move in the same direction, but already in the form of five-wave models.
Thus, he discovered the main pattern, from which, like bricks, the whole structure of the market is formed.
Looking closely at the driving big waves, he found that they all consist of five small ones. Is it possible that this is a coincidence? Having examined a large number of graphs and obtained a representative sample, he realized that this was a regularity.
Moreover, these models were nested in each other. That is, each cycle included the same zigzags - they were reduced likenesses of himself.
So the law was discovered, which was called the law of the Elliott waves.
The fractal theory of chaos self-organization and the principle of similarity were discovered by Mandelbrot later (in 1954), but Elliott was the first to see the manifestation on the charts of the Dow Jones index and described in detail.
Today, wave theory has proven effective. Many books and teaching methods on this subject have been written.
One of the followers of the Elliott Wave Principle is Robert Prekter. He supplemented the theory with new models and compiled a detailed catalog of all patterns.
The social nature of waves
Robert Prekter, together with J. Frost, in 1978 published the book "The Elliott Wave Principle - The Key to Understanding the Market." What is the value of the theory?
Elliott himself called the laws discovered by him the universal law of nature. He showed a direct connection of wave models with the mathematical Fibonacci relationships.
Later, Robert Prekter (a popularizer of the Elliott principle) saw a direct connection between these models and human behavior. He linked the nature of the zigzags on the curve with the mood of market participants and came to the conclusion that according to the schedule, you can predict the further direction of the price.
That is, the reason for the rise or fall, the intensity and duration is not due to economic news, but investors' expectations, the degree of their fear or greed.
Wave Theory in Exchange Practice
Zigzags on the chart play the role of a filter. In combination with technical indicators and a news background, they provide excellent opportunities to predict the further development of trading. The Elliott Wave Principle reflects the mood of market participants. This makes it possible to use such an analysis in the creation of trading systems.
The trend model of the impulse gives clear signals to the continuation of the price movement or to its close completion. Correctional structures within clearly defined boundaries give signals for the completion of amendments.
However, not everyone agreed with this theory. The French mathematician Benoit Mandelbrot doubted that the development of the situation at the auction can be predicted using waves. Those who trusted only in technical analysis of the financial condition of the market said that Elliott’s theory was not legitimate. She is just a story convincingly told by Robert Prekter.