A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Merits of Elliott Wave Analysis
11/17/2011 8:30 am EST
Elliott Wave analysis is based on simple, repeatable, and reliable patterns that occur in all markets and time frames, says Jim Martens, giving tips on how to get started in Elliott Wave.
A lot of traders use Elliott Wave these days to look at charts and find good patterns to trade. Our guest today is Jim Martens; he’s an expert in that. So Jim, first of all, what is Elliott Wave?
Back in the 1930’s, R.N. Elliott discovered that markets move in patterns, and it’s a very simple pattern. It’s a five-wave movement in the direction of the trend. Countertrend movements unfold in three waves, and of course, since it’s a correction, it holds the origin of the previous five.
And they reoccur on all different time frames. So for instance, recently, we identified an aussie/dollar (AUD/USD) decline starting from the early ‘70s that declined for decades, then we had a decade-long three-wave recovery that is being reversed.
We see the same pattern on shorter-term charts. For instance, recently, the dollar/Swiss franc (USD/CHF) has rallied in five waves off its low, signaling a trend underway.
But we can go intraday and look at 15-minute or hourly charts and see the same patterns unfold over and over, and we’ve been watching these patterns for years.
So what do I do if I see a pattern getting close to completion on a daily chart, but I’m looking at a 15-minute chart, and on the 15-minute chart, we’re still at the first wave. How do I interpret those two together?
Well, they work together. So what you’re really looking for—and you have it exactly right—you’re starting with your daily chart and you see a pattern that you think is near completion. Then you look at the intraday chart and you say “Has it turned?”
So if the daily chart shows a five-wave advance—a three-wave pullback in the correction—you can drop down to a 15-minute chart and say “On that degree of trend, do I see a small, five-wave rally?” and that would signal the turn has occurred on the daily chart.
So they work together. It’s the same patterns on multiple charts.
You’ve had a lot of experience doing this, obviously, so you’re pretty adept in counting those waves, but is there some interpretation about which is the wave and when it completes, and how do you get better at doing that? Do you confirm with a friend who’s also reading these as well?
Well there are multiple interpretations at any given time. It’s very rare that it’s just one.
I often will be juggling several counts. But if they’re all bullish, then I have the information I need to proceed. As the market, in that case, advances, it will do something that will kick out a count, so then I’ll be down to, say, two. Then later I may be down to what the exact count is, but most important to me is the trend.
Now, for part two, how I get better at it; it’s just having to do it. That may mean comparing counts with someone else you know and trust, but mainly, it’s just keeping an open mind, being unbiased, and going where the market tells you to go.
And how long did it take you to feel really confident in your ability to count those waves? Are we talking years, or months, or how did you get there?
Well I’ve been at it for probably about 25 years, but it’s like any method, if you read about it and it agrees with you, then it’s going to be easy.
There have been people who I think have put in the work and it doesn’t mesh with the way they think, and other people I’ve seen pick it up in a matter of months and become proficient in six months.
People who I talk to, even though I’ve done it for years and they’ve done it for six months, I value their opinion as well.
So it’s like any method, and I always tell everybody if you find something that works for you that you believe in, you have to stick with it.
So eventually you probably get to the point where you are where you just look at a chart and you can see the waves almost counting themselves.
I see it or I don’t, and that’s a great question, because if I don’t see it, I move to a different market.
You don’t try to force it.
No, and that’s where most people make the mistake. Because “there has to be a pattern here, and I’m going to find it.”
I flip a page, and if I see that pattern, then I’m going to look at that market and see if there’s an opportunity brewing. Is the opportunity now, or is the set-up still unfolding, so I know to come back to that market later.
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