The Elliott Wave
The Elliott Wave Principle of technical analysis has gained in popularity in the past 20 years. Even though it was first proposed as a way in which to forecast market trends in the 1930s, its use among technical traders has increased in recent years as its principles become better known along with its past successes. Until recently, most of wave analysis relied on the skills and experience of Elliotticians. Every Elliottician has his own unique methods for spotting and counting waves and as a result, Elliotticians don’t always agree with the wave count of one another. Elliotticians describe wave counting as an art rather than a science. Given the labor intensive nature of this practice, the number of stocks that can be analyzed is small and the number of missed opportunities is large.
Trading Central has developed a sophisticated yet easy to use Elliott Wave analysis solution that uses quantitative characteristics associated with the waves that appear in market data, to allow each wave to be uniquely identified. This solution scans through thousands of financial instruments across the world every day to identify Elliott Wave events from the price data of respective instruments. Researchers and investors can select a particular instrument for analysis, along with other technical indicators, oscillators and classic patterns to get a complete technical perspective on the chosen instrument.
This paper discusses the various challenges faced by Elliotticians and investors while applying the guidelines of Elliott Wave Theory and the solutions developed by Trading Central to address these challenges.
Elliott Wave Theory
Ralph Nelson Elliott discovered that stock prices trend and reverse in recognizable patterns and that these patterns are created by underlying crowd behavior based on the fear and enthusiasm of investors.
Elliott used the data from the Dow Jones Industrial Average to discover that the ever- changing path of stock market prices revealed a structural design that, in turn, reflected a basic harmony found in nature. From this discovery, he developed a rational system of stock price analysis.
He isolated thirteen patterns or “waves” of directional movement that recur in markets and are repetitive in nature, but are not necessarily repetitive in time or amplitude. He then described how these structures link together to form larger versions of the same patterns, how those in turn are the building blocks for patterns of the next larger size, and so on. His descriptions constitute a set of empirically derived rules and guidelines for interpreting market movement...