Module 9 - Elliott Waves and Cycles of Time
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The document presents insights on Elliott waves and trading patterns from the perspective of the author, emphasizing concepts like candle size, shape, and location to determine market sentiment. It outlines the Elliott wave theory, which describes price patterns in a 5-3 sequence, and introduces Fibonacci ratios essential for analyzing market movements. The document also provides three fundamental rules governing the application of Elliott wave analysis to ensure accurate wave counting.
Module 9 - Elliott Waves and Cycles of Time
- 1. The Responsible Trader Lessons The Responsible Trader Lessons The Responsible Trader’s - POV Module 9 – Elliott Waves and Cycles of Time
- 2. The Responsible Trader Lessons The Responsible Trader Lessons The Responsible Trader’s - POV • The Responsible Trader's POV (Point of View). • These are my notes, my own additional research and studies on the Topic that I posted, and my personal observations and opinions that I am sharing to further enhance our knowledge and understanding. • Some of these were previously posted on “The Responsible Trader” thread, Stock Market Pilipinas (www.stockmarketpilipinas.com). This is the latest version of previous posts I made. • Some of these plus further explanations and discussions will be appearing in my forthcoming book “The Responsible Trader.”
- 3. The Responsible Trader Lessons The Responsible Trader Lessons 1. Size – the larger and more solid the candles, the higher the sentiment. Increasing size of green candles show bullish sentiment. Increasing size of red candles show bearish sentiment. Charts courtesy of Amibroker Charting Software
- 4. The Responsible Trader Lessons The Responsible Trader Lessons 2. Shape – The shape of the candlestick or pattern determines the type of pattern generated, the possible trading signal and the potential direction of the trend. Bullish engulfing – a large green candle engulfing a small red candle in a downtrend Bearish engulfing – a large red candle engulfing a small green candle in an uptrend Charts courtesy of Amibroker Charting Software
- 5. The Responsible Trader Lessons The Responsible Trader Lessons Single Candle Patterns – the Hammer and the Hanging Man – both have the same shape but their names vary depending on their location. Hammer in a Downtrend, a Reversal Signal A Hanging Man in an Uptrend, a Reversal Signal 3. Location – determines what the Pattern is called Charts courtesy of Amibroker Charting Software
- 6. The Responsible Trader Lessons The Responsible Trader Lessons Ideally, in an uptrend prices should move along a straight line in an upward direction through time. The stock market does not work in ideal conditions. I call deviations from the straight line movements, distortions. For every distortion there is always an equal and opposite correction. In trading, we also call corrections as Retracements.
- 7. The Responsible Trader Lessons The Responsible Trader Lessons Correction in the Stock Market comes in two Forms. The First is Correction in Price. The deviation from the straight line shown by the price movement upward is immediately corrected by a movement back towards the straight line.
- 8. The Responsible Trader Lessons The Responsible Trader Lessons The Second is Correction in Time. The deviation from the straight line shown by the price movement upward is slowly corrected by a sideways movement back towards the straight line.
- 9. The Responsible Trader Lessons The Responsible Trader Lessons If we continue this pattern of upward price movements and correction, we are going to have the figure below. Do you recognize the pattern? You are right. This is the basic Elliott Wave Pattern and I have color coded them here. This called the 5-3 Patttern.
- 10. The Responsible Trader Lessons The Responsible Trader Lessons The first 5-wave pattern (1,2,3,4,5) are called impulse waves. The last 3-wave pattern (a,b,c) are called corrective waves. The first 5 wave Patterns (1,2,3,4, and 5) are Trend Waves. Waves 2 and 4 are corrections within the Trend. The corrective Waves a,b, and c are Counter-Trend Waves.
- 11. The Responsible Trader Lessons The Responsible Trader Lessons Whenever I discuss Elliott Waves, there are always two names that come to my mind. The first is Ralph Nelson Elliott. Ralph Nelson Elliott - American accountant and author who developed the Wave Principle a form of technical analysis that identifies trends in the financial markets.
- 12. The Responsible Trader Lessons The Responsible Trader Lessons Wave 1 – Initial Take Off – Mostly professionals, No amateurs Wave 2 – Profit Taking After Initial Take Off – Mostly professionals, No amateurs Wave 3 – The Strong Rally – Mostly professionals and some amateurs
- 13. The Responsible Trader Lessons The Responsible Trader Lessons Wave 4 – Profit Taking and Buying on Dips. Professionals taking profit and amateurs buying on dips Wave 5 - Irrational Exuberance. Few professionals and mostly amateurs Wave a,b,c – Professionals shorting the market, Mostly amateurs cutting losses.
- 14. The Responsible Trader Lessons The Responsible Trader Lessons As Elliott observed, wave patterns form larger and smaller versions of themselves. This repetition in form means that price activity is fractal.
- 15. The Responsible Trader Lessons The Responsible Trader Lessons
- 16. The Responsible Trader Lessons The Responsible Trader Lessons A Grand Supercycle is made up of Supercycle waves which is made up of Cycle waves which is made up Primary waves, which is made up of Intermediate waves which is made up of Minor waves which is made up of Minute waves which is made up of Minuette waves which is made up of Sub-Minuette waves.
- 17. The Responsible Trader Lessons The Responsible Trader Lessons The second name that comes to my mind is Leonardo Pisano for the Fibonacci Retracements Leonardo Pisano, better known by his nickname Fibonacci, was a great Italian mathematician who first observed certain ratios of a number series that are regarded as describing the natural proportions of things in the universe, including price data.
- 18. The Responsible Trader Lessons The Responsible Trader Lessons The ratios arise from the following number series: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 …… This series of numbers is derived by starting with 1 followed by 2 and then adding 1 + 2 to get 3, the third number. Then, adding 2 + 3 to get 5, the fourth number, and so on. The Fibonacci ratios are derived by dividing any number in the series by the next higher number, after 3 the ratio is always 0.625. After 89, it is always 0.618. If you divide any Fibonacci number by the preceding number, after 2 the number is always 1.6 and after 144 the number is always 1.618. These ratios are referred to as the “golden mean.” Additional ratios were then derived to create ratio sets as follows:
- 19. The Responsible Trader Lessons The Responsible Trader Lessons When R.N. Elliott wrote about the Wave Principle, he stated that the Fibonacci sequence was its mathematical basis. Elliott waves both impulsive and corrective adhere to specific Fibonacci proportions. Common objective for Wave 3 is 1.618. Wave 5 is equal to Wave 1, Wave 2 is .618 of Wave 1 and Wave 4 is .382 of Wave 3.
- 20. The Responsible Trader Lessons The Responsible Trader Lessons 3 Cardinal Rules of the Elliott Wave Theory Rule Number 1: Wave 2 can never retrace more than 100% of Wave 1. Rule Number 2: Wave 4 may never end in the price territory of Wave 1 Rule Number 3: Out of the three impulse waves 1,3 and 5, wave 3 can never be the shortest. A violation of one or more of these rules implies that the operative wave count is incorrect.
- 21. The Responsible Trader Lessons The Responsible Trader Lessons Summary: 1. Elliott Waves are fractals. Each wave can be split into parts, each of which is a very similar copy of the whole. Mathematicians like to call this property "self-similarity". 2. A trending market moves in a 5-3 wave pattern. The first 5-wave pattern are called impulse waves. These are also called Trend Waves. The second 3-wave pattern are called corrective waves. Letters are used instead of numbers to track the correction. These are also called Counter Trend Waves. 3. There are 3 Rules to be observed when using the Elliott Wave theory Rule Number 1: Wave 2 can never retrace more than 100% of Wave 1. Rule Number 2: Wave 4 may never end in the price territory of Wave 1 Rule Number 3: Out of the three impulse waves 1,3 and 5, wave 3 can never be the shortest.
- 22. The Responsible Trader Lessons The Responsible Trader Lessons For your information, in connection with my Advocacy, Responsible Trading, I have established the following in order to reach out to you more effectively and serve you better. Please visit, like and share: My Blog:http://www.theresponsibletrader.com– where I write and share lessons on trading and my thoughts about trading in particular and life in general My Facebook Page: https://www.facebook.com/theresponsibletrader – where I share what’s on my mind and make posts to groups where I am a member of My YouTube Channel: https://www.youtube.com/theresponsibletrader – where you can view and download my TRT-POV (The Responsible Trader’s Point of View) and other videos I intend to make My Slideshare: http://www.slideshare.net/TheResponsibleTrader – where you can view and download copy of the Powerpoint Presentation of my TRT-POV (The Responsible Trader’s Point of View) and other presentations I intend to make