Tags: Elliott Wave | correction | wave | analysis

The Value of Elliott Wave Analysis in Analyzing Financial Markets

By    |   Monday, 03 March 2014 06:48 AM

Some people think technical analysis is a bunch of hocus-pocus. However, it's a great way to see the supply/demand by seeing who's in charge, whether it be the buyers or the sellers.

The buyers are in control when the stock or commodity, etc. is trending higher and the sellers are in control when it's trending lower.

Also, in technical analysis, if you can't eyeball the chart and tell whether it's trending higher or lower, there are things called "moving averages" that smooth out the price action and form a moving average line that will slope up or down and therefore point out the trend's direction.

And all of these forms of analysis are good and help the investor on long-term charts and the trader on short-term charts.

But the Elliott Wave principle builds upon this type of charting analysis because it actually lets you know what stage of the trend you're in.

For instance, the average chartist can tell you when there is an uptrend or downtrend, but they have no idea when it's going to end until the new downtrend has begun by breaking a trend line, etc.

However, in the Elliott Wave principle, the Elliottician knows that there are five waves (which they label 1 through 5) to a trend's direction, and it's followed by three major corrective waves (which they label A, B and C).

There are also certain attributes to each wave that helps the investor or trader know more about the asset's next move and potentially how far it might go.

For instance, in waves 1 through 5, there are three advancing waves (1, 3 and 5) and two consolidation or pullback waves (2 and 4).

The pullback waves have three waves of pullback within them. So when the third wave is forming, you know the pullback is coming closer to its end and it's likely safer to buy into the overall uptrend since the downside is likely limited then and the upside potential is huge.

In a consolidation sideways, we get a glimpse as to when the range might end because these consolidations tend to have five back-and-forth waves within them. So once the range has bounced up and down for its fifth time, you know that by entering then, you've likely cut out some of the "dead time" where the asset essentially did nothing, and yet you're on board for the next launch higher.

We also know something about the advancing waves. For instance, we know that wave 3 tends to be the longest and strongest of all of the waves, more times than not. And when it's not the longest wave, wave 5 is the longest.

Therefore, we can look at the trend's first major advance (wave 1) and measure how far it went and we'll know that when wave 3 gets underway it will go longer/further than wave 1 did in distance.

So there are many advantages to knowing Elliott Wave analysis. If you want to learn more about this form of technical analysis, follow my weekly video updates in the Ultimate Wealth Report.

Additionally, you can read a book "Elliott Wave Principle" by Robert Balan. There are other books out there, but his is the easiest to read. You see, there are rules that help define a wave, which helps you discern which wave you're on and therefore tells you how much further the asset has to trend, due to the wave counts.

For instance, if you see that the asset is in wave 3, then you know there is a pullback or consolidation to come, but then after that, another advance higher.

When are the best times to enter an asset from an Elliott Wave point of view? Enter at the end of a major A, B or C correction (at the end of wave C). This will get you in at the lowest prices typically, but requires more patience and holding time, because you want to be on board at least through wave 3 minimally.

Getting in at the end of wave 2 gets you in at almost as low a price and cuts out much of the waiting time before the trend's major advance. This is why many Elliotticians love to buy near the end of wave 2s, so that they're on board for the huge wave 3s to come.

Also, the risk-reward ratio is very favorable buying near the end of wave 2. The pullback in wave 4 can be bought, but it's the least favorable of the entry points because three of the five waves are over and there's only one last thrust higher for the asset. And after that, a major correction lower begins. So it's the least desirable of these three entry points.

But for more on Elliott Waves, follow my analysis each week of our Ultimate Wealth Report positions. You'll pick up a lot just by hearing me talk you through each of the charts. And for further reading, pick up Balan's book. It's where I learned much of what I know about Elliott Wave analysis.

I think that once you learn this form of analysis, you'll find that it's a superior form of technical analysis — much more advanced than just using technical indicators, but also makes the reading of technical indicators more accurate when you interpret them in light of the wave counts.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
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Some people think technical analysis is a bunch of hocus-pocus. However, it's a great way to see the supply/demand by seeing who's in charge, whether it be the buyers or the sellers.
Elliott Wave,correction,wave,analysis
Monday, 03 March 2014 06:48 AM
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