Elliott Wave Trading 101

A good study of ElliotWave theory would benefit the new traders as they do the professionals the world over who use them. The time taken to really understand then and where they can from can add more depth to ones trading. The advantages gained in implementing the theory can far outweigh the costs in terms of time to learn it.

R. N. Elliot (1871–1948) was a financial mastermind. His financial genius is reflected in his formulation of the Elliot wave theory, which is still being used successfully, 75 years from the time of its inception (1934). Elliot opted for the accounting profession when he was 25 years old, and then for the next 25 years, he occupied top financial positions in railroad companies in Mexico and Central America. During his stints, he rescued many companies from the brink of financial crises, earning himself the reputation of an expert business planner and organizer.

Eventually, Elliot moved into a hotel in Brooklyn, which was a stone’s throw away from Manhattan’s financial hub. In 1939, Elliot was contracted by the magazine Financial World to write a series of articles around his Wave theory. These articles further cemented Elliot’s rock-solid reputation with investors and fund managers.

In the year 1920, Elliot moved to New York and his reputation and expertise got him a top accountant position in a U.S. Government’s International project. Then in 1924, he was chosen as Chief Accountant of Nicaragua, which was then controlled by U.S. Marines. In early-1925, Elliot applied his expertise and experience in managing and restructuring the finances of Nicaragua – an entire country!

He suffered from the symptoms of an alimentary canal illness, which he had picked up from his Central American stint. His reputation was on the rise – his book was selling well, his background and references were the talk of the town, and he was an always-in-demand speaker, and his practice was booming. In the best of times came the worst of news – Elliot was diagnosed with pernicious anemia, a debilitating medical condition, and became bedridden at a relatively young age of 58.

In November 1934, Elliot presented his theory to Charles J. Collins, a reputed member of the financial community. Apart from exchanging telegrams, nothing much happened between the two until 1935 – the year in which the Dow index was in a bear grip and was falling to pieces. Everyone was bearish and it seemed like the end of the financial world.

According to Elliott, herd mentality in general follows cycles of optimism followed by pessimism, and the same holds for the minds of the investors/traders. These are reflected as a sequence of predictable ups and downs in the stock market, the ups representing the dominant trend and the downs the corrective phase in a bullish market - and vice versa in a bearish market. Elliott discovered that the wave patterns made on the charts had the unique mathematical characteristics of what came to be known later as "fractals" - mathematical/geometric structures that keep repeating themselves infinitely on an ever-diminishing scale.

By applying fractal mathematics to price movements in the market, Elliott developed his wave theory to make market predictions based on collective crowd behavior.

Elliot passed away in 1948, but his brilliant formulation – The Wave principle or The Elliot wave Theory – continues to produce amazingly accurate results till this day, rewarding the faithful in the process.