The creator of wave analysis, Ralph Nelson Elliott (1871-1948), was an early career accountant and highly respected in professional circles. Many companies owe their success and prosperity to him.
At the end of the 20s, he was forced to completely retire due to a serious illness.
During the periods when the disease receded, he analyzed the stock market charts, as the sharp mind of the analyst required work.
The Great Discovery
The Elliott Wave Principle is not pure theory. These are empirical observations and cataloging of certain models.
Comparing charts of different time periods and scales, Elliott discovered one feature in a graphic drawing. He noticed that during corrections, the curve formed zigzags. After that, the price continued to move in the same direction, but in the form of five-wave patterns.
Thus, he discovered the main pattern from which, like bricks, the entire structure of the market is built.
Looking closely at the driving large waves, he found that they all consist of five small ones. Is it possible that this is a coincidence? After examining a large number of graphs and having received a representative sample, he realized that this was a pattern.
Moreover, these models were nested inside each other. That is, each cycle included the same zigzags - they were reduced likenesses of itself.
So the pattern was discovered, which was called the law of Elliott waves.
The fractal theory of self-organization of chaos 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 the wave theory has proved its effectiveness. Many books and teaching methods have been written on this subject.
One of the followers of the Elliott Wave Principle is Robert Prechter. He supplemented the theory with new models and compiled a detailed catalog of all patterns.
The social nature of the waves
Robert Prechter together with J. Frost in 1978 published the book "The Elliott Wave Principle - the Key to Understanding the Market". What is the value of theory?
Elliott himself called the laws he discovered the universal law of nature. He showed a direct connection of wave patterns with mathematical Fibonacci ratios.
Later, Robert Prechter (popularizer of the Elliott principle) saw a direct connection between these patterns and human behavior. He connected the nature of the zigzags on the curve with the mood of market participants andcame to the conclusion that the chart can predict the future direction of the price.
That is, the reason for the rise or fall, intensity and duration are not due to economic news, but to the expectations of investors, the degree of their fear or greed.
Theory of waves in exchange practice
Zigzags on the chart act as a filter. In combination with technical indicators and the news background, they provide excellent opportunities to predict the further development of trading. Elliott wave principle reflects the mood of market participants. This makes it possible to use such analysis in creating trading systems.
Trend pattern momentum gives clear signals to continue the price movement or close to its completion. Corrective structures within well-defined boundaries signal the completion of corrections.
However, not everyone agreed with this theory. The French mathematician Benoit Mandelbrot doubted that the development of the situation at the auction could be predicted using waves. Those who trusted only technical analysis of the financial state of the market said that Elliott's theory was not legitimate. She is just a story told convincingly by Robert Prechter.
