The Law of Nature part-1

Over centuries thousands of scholars have made an effort to theorise principles of market movement. Some of them were accepted by the crowd and the rest eventually got buried and now rest in peace. However, the ones that stood all along these years of shock and trauma equipped some of the greatest investors and traders of all time. Take sir Alexander Elder for example with his formulation of the revolutionary TURTLE or the Turtle Trading System as it implies stands tall a mindboggling world record at the U.S trading Championship. Although, not all principles are as broadly followed by todays rational crowed, two theories among all battled defiance for centuries proved worth at all instances. Dow Theory being the first widely accepted phenomenon has cemented a place in academics all around the globe but the one that got me stunned with its potential of prediction is as we all refer to as the law of nature the almighty Elliott Wave Principle. The Elliott Wave Theory was written by Ralph Nelson Elliott in the post world war era. With the help of Charles Collins, Elliott put forward his findings forth the world for the first time. In its adolescence the Wave theory caught the eyes of a few who had the vision, over the years data was analysed and amendments and modifications were made to create the absolute study of market behaviour and got labelled as The Law of Nature. Although, attempts prior the Elliott Wave were made to explain market movements in cyclical theories none of them stood the test of time, gradually fading their mantles to the random walk phenomenon as explained by Efficient Market Hypothesis. Elliott was the first to suggest that prices progressed as a wave and obeyed certain guidelines also; he was the first to successfully explain the characteristics of corrective patterns. Scholars round the globe had previously advocated economic cycles and price movements based on periodic developments. Among the top theorists were N.D. Kondratieff, Joseph Schumpeter and Kitchin. We dont know for sure whether Elliotts work was influenced by these studies but an intellectually honest man as Elliott was would have mentioned their names somewhere in his writings. Elliott began with one major Long-Term force, which he subdivided lesser short-term forces. But, Elliotts subdivisions were more detailed than Schumpeters and notably free of cyclical constraint. Elliotts work convincingly falsifies all who consider Technical Analysis as a short term perspective and why am I stating this is because Elliott classified these wave based on the time taken by the prices to complete a wave formation. Here is how he distinguished the degrees of waves:

Grand Super Cycle- this was intended to cover the longest feasible quantifiable time period. As of existing historical records, we have no concrete evidence of completion of a grand super cycle, since Elliotts records only go back to mid 1800s. Super Cycle- this is the next lower degree and could range for about a century. Elliott claims that a Super Cycle began in 1857 and completed the Impulse move in 1929 later it corrected from 1929 to 1949. Cycle- the immediate lower degree in order could range anywhere between a few decades. Primary- the further break down of each leg would give us a primary wave pattern that could range for a few years. Intermediate- this is the most preferred time span by traders around the world and travel for a few months.

The next lower degrees of waves breaks down in identical fashion squeezing the time frame with each descend it goes as Minor, Minute, Minuette and Sub -Minuette and could analyse the price action in similar methodology for the shortest feasible timeframe. The sub-minuette wave could be ranging only for a couple of hours. Its said and quite so that The Elliott wave principle does not offer absolutes but alternatives; it is a guideline for your judgement, not a substitute.

Disclaimer: The above article is not intended to influence any sort of investment nor is a recommendation for trading any mentioned stock. it is to be utilized solely as an illustration for educational purpose only.

Shounak Pohankar Managing Director, Shounak Pohankar Financial Services Pvt. Ltd. For any queries relating to todays and previous articles write to author on Shounak@shounakpohankar.com. For further information on related topics visit www.shounakpohankar.com