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Foreio n Excb ance Markets c»

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BBS Financial Publications

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Robert Balan © 1989 by Robert Balan and BBS Publications A Vallion Company



All rights reserved. No part of this book may be reproduced in any form or by any means without permission in writing from the publisher. Printed in the United Kinadom Disk to Print Ltd.
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West Hampstead London NW63EW Tel: 01 - 625 5225
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A typical Elliott Wave trading plan Case studies Conclusion Illustrations by topic Index I The Wave Analyst - A ". N"W"'~ _ ~ '" .Contents Foreword Acknowledgements 0 " Organization of the book Introduction The fundamental conceots Devianons Guidelines and nth". _'- - I II ill TV Practical guidance I V VI VII VIII .

so has the demand for increased research and analysis into the dynamics of currency movements... The need was for experienced and proven ..0 urat rorm we oasic rrameworx -. As this awareness has grown.. Theforexmarketsnow onerate flnidlv on a Za hours a dav basis from the Mondavrnomins ouenine in Wellington.<pr! PC'nnn~. . . rest of that decade the forex markets were in what is best dcscibcd as their .Foreword The modern foreign exchange markets date from the early seventies anathe eventual breakdown or the rsretron w ooos ana SmithsonianAgreements on fixed parities. The markets were dominated out of London and New York whilst the Far-East was a distant third. and even by many U1(. manage their currency exposure and that this management has to be on a continual basis. stock exchange crash of October 19th. The "touch" of the successful "spot" forex trader is in his abilitv to rapidly rationalize market movements and in the speed of the implementation of those trading decisions. "6' -". These market were considered to be highly unpredictable.p< h"". These stem from the trader's experiences 0" .. was Hl l<. until Friday's evening close in New York.r· uw"vu". investors and corporates consiaerea me market [Q De nignly spectrlattve./\ \ It! '.1..- ~c ph. In general. "11. thPrp i c tn Flrvut freef v ao ainct . placing it in perspective of the current market '1'h. Over the last eight years much has changed.. "c 'r ...." ~r could not be taken too seriously. but also one of the most liquid and transparent markets. somewrrartrriqum"uu .n. the laws at probabihty anammet psycnology ..... As from 1973 the currencies of the major "free" .. "oversold" (price action). Chartism as a part of technical analysis enables a rapid visual of any price action. ~f tho "P"r! tn lh juvenile phase of growth." More significantly the U. . The initial reaction of most seasoned traders then. '6' ' ..'. what the potential for a market move is (risk/ reward ratio) and the likelihood of such a move (probabilitv).. 1987 demonstrated the legitimacy of the lorex markets toDe consiOerea not only as the largest.0 fnr" . of repeated market patterns lq q and the inbred feeling of having been -J . With the arrival of desk-ton comnutinc Dower in the earlv eizhties technical analysis and chartism began to make a significant appearance in the Forex markets..1 .nthpr ]:lnr thp . "n 'm 0 . It was from this development aegan lU ue "jJjJlleu..1 P~<v ~"n e-ar-lv ." m-ir-e ~('tinn and rp(lllbr1v nrf'nirt with anv accnracv the future UI~\~" ucrorc..S..1nofr.. New Zealand. was one of scepticism. Most dealers now accept resistance and suvvort levels j . nF' -r tradinz levels. full of uncertainty and inexperience with varying degrees of liquidity.dV" MlldIYS! Foreword -1 " .. This somewhat egotistical approach in hindsight made more out of ignorance and perhaps with a touch of arrogance rather than from any real understanding of the markets' dynamic runoamentats. .vp1 analysis tr"n.. ''''UlOl is individually anu . These are the main foundation blocks of technical analysis. " '"~. U" uiese of chartism and technical analysis.

. Robert Balan. ' "1' o.hf' (yHici"lin".'p t r-artin ~ c .~:. and Trading decisions using chart patterns and price projections should always be supported by some form of probability analysis on the potential tor such a move and also its likely timmg.F'llint Wav» n . II uues It .." '." .('to" into a larger order of events and a wider Tuming to the author. One either embraces the tools that can underpin trading decisions or ignore them at one's own peril. Above all the Principle accepts implicitly the technical chart patterns used by other systems whether terminal or '1' Michael Salt. structure into an order. cal analvsis in general can not predict economic announcements but it does recognise with some exactitude the state of the market and the probable price action in response to those statistics or decisions. I have over the last few years seen His concepts take SHape. . . '"U'" "FF>V""" ". h.~.nue ()n "hirh t{) ~"" "" '" .:w'.reacn a matUrity rnar III we lorex market IS remarkable..:v~~~<"~~~~"f'~~:~:~r:.." .. as a "Head and Shoulders" perspective. be they a 3rd Wave or a C Wave. The I' A The Wave Analyst ForeWOrd -2 -- . . The application of the Principle is not infallible but when its applied correctly it is overpowering in its market interpretation as well as its success.~'. The primary objective is to establish the presence of the most destructive and thereby the most profitable wave formations. . . but many do so without appreciating u'" fr"ui1p {)np success of Robert's commentaries clearly demonstrate the respect his "V"""F'" u"""'u u'''''' . I Ill' CIlIVU . . His success rate both in the strategy and the timing of trades have given rise to hundreds of avid readers throughout the trading world to his published dailv market commentaries. It.. UU. '"~..derived from analysing chart patterns. This combination allows tor a strong ana reliable teetrrricat suppOrt or rraaing ana investment dectstorrs: It is from this that the decision-maker should then look for the catalyst event that "{)Hlci trioor-r th" movemr-nr Ths.. . ..: ac ~ f~('t {)f'lif.. .~< with tp"hni- the values that he has developed over the past 12 years in the practical application of the Elliott Wave Principle to the foreign exchange markets. Some of these insights and guidelines are probably unique to Robert's mterpretanon or the Elliot Wave i-nncipre and OIIertne tact mat pnncrpres anu meortes are IIUtinviolate OUtwit over time ue 11VIll their original concepts. " e"aICuy lila" u prtflUplC. 'ave rllllLIl'le .

Giac also contributed valuable editorial advice.·. VIl'UHtllUlllll LUllUUll . DUUK in eany 1'. he deserves part of any success .' Fverv now and then Mir-has-l Salt mv ho" at me U rmrate W..\·.\ .. my thanks and appreciation. I also decided to get even by asking him to write the Foreword. To those people. as did some friends in the foreign exchange field.or blame . concuctec mouse."i1IU ill u"SKlUp-l'uDlislling. Some close friends in the forex field also extended support" when the going became tough. U"IUI" uic uuu!'.. Tony Garcia.1 Degan lU seriously think of the possibility of writing a "user friendly" book on the Elliott W:lVP.1 M.. t~' .. . Mike . ". Hong Kong. t agemakcr and Macintosh in a symphony of text and graphics that rates a standing ovation The seed of the idea for this book was sown by Giacomo Ivaldi.. diagrams and charts. which made more convincing the suggestion that a "how-to-do-lt" manual of wave analysis has a contribution to make. Geneva helped in lUI I"'-'"Udl ""VIS II Llovds Bank in Geneva would urge me on.. Acknowled_aements -1 . but I wondered whether I would fmd the collaborators who would translate the concepts into required illustrations.1.. largely responsible for pursuing this project. Frankly.M "'M~ I also wish there were some way to thank the numerous individuals who have played a role in shaping up the ideas that eventuallv found their way in the book. and ". Hans Moerkerken. Director of Foreign llldlUlIg '.~. my boss at Lloyds Bank.. a colleague at Lloyds Bank. ~. a lot of "moral Sevilla. then left to become . IT . Franklin nnn Uo' . my SIncere tnanks. . the thought of writing this book was intriguing.10'. . DilllK . DUlllUl . Marco Bernasconi. (U Salt has since "'WI'S .Acknowledgements 1-\ Y"'" prior 10 uie p I Ul uti.\l .that the book may receive.. rur mose reuow CUiollicians.)... which he has done. I also received a lot of feedback from readers of my Reuters and Telerate daily commentaries.f.

Organization of the book

1ne nOOKIS uiviuea mLOeignt pans. l'art lIS a general mtrooucuon




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difficulties and possibilities is provided.

inherent in wave analysis. A brief background

Part VI outlines a typieal Elliott Wave Trading Plan from the initial stages Of1l1e trru:fltlOnarIIVe-wave sequence, througn ltsrmiU corrective stages, illustrating various optimal trading strategies.
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concepts of Elliott Wave Analysis. The basic patterns, and their more common variations, are provided in easy-to-compare illustrations. Provided too, are the most common pattern

Part II describes the fundamental

author. Daily comments have been assembled be applied for future events.

into case studies which can




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from the normal wave both in terms of ratio, and in form. Examples of substitution ones are ruso shown m never-before-



that should be of value to anvone who is iust starting

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wave analysis. Even veteran wave analysts may find the insights provided in this extensive body of tips and comments useful and informative.
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that are of a constantly changing nature. Substantial sums of money can be

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negligible transaction costs combine to allow very short-term trades transactions that are initiated and consummated in as short as 24 hours. If taken as often as opportunity arises, these shortened trades can add up to an enourmous profit potential. This is a fact that is of prime importance to those
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five years? If so, how do you do it and what are the risks involved? In the foreign exchange markets, where the value of the world's currencies are constantly nuctuanng, there are currency movements Trequent enough, wide enough and often enough to permit this, and more. Such exceptional results are not impossible. Methods and techniques preepntpn ",ithin tl-ric,.,,~nH~1 nr"nprl" nlili7pd



The key to any lasting and succesful trading strategy lies in the ability to "time" trades, both in entering into and exiting from the market place, a situation which precludes the traditional "fundamental" method of analysis. Given a timing capability, a whole new concept of profit maximization becomes possible: improved timing permits shortened trades,
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oer cent per month well within the realm of possibility. Comooundins profits at this rate would yield $1,000,000 on $10,000 capital in little more than 4 years.
V1111" U'''''' ""'1111' lllay '''COll1 ,'v HICO coaucol , L11"y iii" HUl I impossible. However, they do imply the capability to do very regular trades that have corresponding high rate of success. The basis of that capability to recognize trading opportunities, together with the essential techniques to win, are the main elements addressed by this manual through the use ofthe Elliott Wave Principle.
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Assuming an accuracy in transaction timing, one will always generate more profits from regular short-term trades rather than from infrequent long-term ones. The impact of frequency and length of trading interval on profitability rests rargeiy on IWOpnenomena mat notes true III the forex market. One is the wave-like nature of forex movements and the opportunities it presents. The other is profit compounding. After each successful trade more funds are available for investment than before. The nature of compound interest law is such that capital growth is overwhelmingly dependent upon the frequency of compounding that takes place. In essence, how short the trade intervals are.
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performing the role of market-makers, and institutional and private investors as well as speculators. The currency markets, as a consequence of their enormous size and liquidity, now provide 24-hour trading capability. This world-Wide feature of the currency markets otters a nost or opportumties

labelled Timing. Over many years of experience, I have still to see a method that has consistently beaten the Elliot Wave Principle for its accuracy in the timing of market turns, which it does sometimes with mind-boggling accuracy. When forex movements are tracked in hourly and in 10minute "snap




1- 1

shots", the wave analyst is figuratively on top of the market, with a panoramic view of the unfolding battle between the forces of suppl y and demand. With that kind of perspective, the analyst is sensitive to the most subtle change in market dominance by any of these forces.
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nosedive. An hour later it was down two pfennigs: it was 16pfennigs lower ten days later. A fluke? A coincidence? Or was it a "self-fulfilling" prophecy?
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with some satisfaction an event in early June 1986; the dollar was surging in the Forex markets after the "G-5" initiated collapse of the Dollar had reached the Japanese's initial threshold of pain. It was almost lunchtime in tzurope; tnc lu-nunute chart for tne dollar/mark was gomg nownere in a seemingly random manner. Two weeks before, the dollar had survived a downward test of the 2.15 lows, followed by a rally of more than 15
nfenni os amidst mounrino srx-culntion thnt the worst for thr- huck

a fluke, not a coincidence, and definitely not a self-fulfilling prophecy that this manual on how to use the Elliott wave principle was written. nus manual does not aim to explain the rationale for the Elliott Wave Theory, nor teach its basics. Several excellent books* on wave principle fundamentals have been written by highly acclaimed authors, so
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over. To wave analvsts however the rallv was the ultimate phase in a consolidation pattern known in Elliot Wave terms as a "Hat correction". This was to be the last hurrah for the dollar - a massive trap for the dollar bulls wnen tne pattern terminated ana tne DUCk resumed Its unuenymg neansn Ut;;IIU. I was paying particularly close attention to the market patterns because earlier I had stated in my daily commentary pages on thc Reuters network (LBGB/LBGC) that we were expecting the resolution of the large "flat" pattern at anytime during the next 24 hours. In anticipation, I had left half of the screen space vacant with the promise that we would inform ,"'''' WIO''''. ~"UIO"C," ac ":~,LaHY ~ w :"',~v"': wa""auy LV r-." into a "horizontal triangle" a very reliable indicator that preceeds the final phase of an existing movement. I watched in fascination as the final "thrust" accelerated to the upside. It was the signal we had been waiting for, a conelusive evidence that the 3-month consolidation phase was over. It was time LO mID in 0 a couar near once again. 1 hurried LO LYP" LMe profit-anda reverse call over the Reuter's network. Barely 20-minutes later, just 5 ':;~:"

manual is to show how to use the principles laid down bv Ralph N. Elliott in the early 1930's. To my knowledge, there is no book written as yet on how to use these principles on areal-time basis. I hope this manual fills this ODVIOUS need. In going through the trade recommendations in Part VII, I have attempted to take the reader through the deductive reasoning process. I have also described the drama that accompanies everv success or failure; the reader will be there to share an insight as we weigh which of the probable patterns will be likely to occur. We will puzzle over a price activity that momentarily does not make sense. And I hope I have done descriptive JU'.""IO ~H<'LJUl~L LV Ul~uy lllUVIO. '" 1'1t;;~:"Lt;;U, tU urc "UU
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knowledge that no one is infallible, the acceptance of a Hawed analysis is

1978) written AT. rost and Robert Prechter Tr.. tuhirh' is a "classic" and consider~d to be the "bible'of the wave principle". Also recommended is The Major Works of R.N. Elliott, edited by Robert Prechter [r.; another must is The Elliott Wave Principle Applied
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~mv" r avc 1 irrctpte can perlorm this multi-face eu aSKaumi amy. t'h r-rmoh mm"r . ..~W rrrr-l irrtinar-v hook the materials was this: "If such fantastic results can be gained in the foreign exchange market. of it nn ~+. Too often for comfort.-1iffpT<'nrf' hpt".U'. U" "". lack training in the emotion-logic balance required for success. These can be orJL. I . the analyst has to sec to It that none or the rules arc VIOlated... it must be able to precisely measure profit objectives against expectable losses. Analysts who are stubborn and fail to apply money management techniques may make alot of money at times.even with the benefit of long and ». lo. To make it work. . Inmv ownooinion the biaaest obstacle to successful tradinz is in the failure even to recognize and accept that mistakes will be made. but the only way to learn is to actually getting on the machine and try to keep from fallin!!.up' . even with knowledge in hand.~ .. a~~VIU nar a. ~""''' . An analogy is likened to learning to ride a bicycle. ..] and failure in trading the forex markets.the cnsumg analysis should be in .. that losses are a fact of life and as such must be accommodated. why isn't everyone doing it?".~ ~"'u v.. . Used properly. and then some.~. says a top-notch analyst who openly admitted to Barron's magazine that "it (wave principle) has defeated him".. but when they are wrong. most foreign exchange players . the exercise is nerpnu in providing a rramcwork against wrncn to JUdge later market um~ LV . but a few stand out. "a. Even if one's forecast is off the mark. .l1aton vour face.. many market players. "'. they give it all back. "J "6 r-rr-orc h"t t hr=ir-aion iFir-aru-r= whirh rn ab-e c the>. or for that matter does not make provisions for errors.!. Hn. Even at times when successful forecasting eludes the trader. "'al'Y V. nrov idino wavs ror-ntr-r into and r-x ir from the markets at extremes in price. . or allow in" profits ton n while "I". And this could be the most difficult barrier.. "'a'~ ~ ''''~~l''~' ~. That is where the real utility of the wave principle lies.. especially amateur individuals. mini"n .. but the patient reader Willsoon nne that the ~ I' A The Wave Analyst Introduction 1-3 . """ '''~ ""~~a. l'V. thot for arrv f-r-nrlirro method to survive for long. that is what the wave principle promises in terms of profit build-up and risk control.!.+h no . -. Errors are an unavoidable part of Elliot Wave .h~~. wave analysis has proven useful in giving a perspective of the market movement. two f'xtTf'mf" The "best of both worlds". The analyst or trader who does not accept this. the Elliot Wave can provide the analyst With a quantitative and a qualitative measurement of the risk involved in any specific trade in its corresponding time horizon.. The truth probably lies in the middle of th". In addition.-1 .-1. 11 T •• ."a' r c> ~.. The message: you will only learn by actually doing it.'' t hi c ". "''' w . ..'" ""btilp eu The Elliot Wave Principle has only three rules and less than two dozen guidelines as its framework.~ u..ppn '''rr<..I' Th~ oucstion asked hv some nconle who ·."lUlv. 'Ihls IS a tall order. r-er-m in= .uans SUUUIU De Kepl anu labelled or "counted" periodically. the forex market unfolds. And finally. the method must also be able to define the time parameters within which the trades have to take place. at the same time.hil.. " • H~H H"U~~' '" .. offor-t . "Too many exceptions to the rules".-1 t . -0" '. in allusion to the total number of waves in a bull-bear cycle.amateur and profesUl uie . There arc several reasons for this...h".v.. re-evaluate. This observation was poohpoohed by a young acquaintance who claimed that' wave analysis can be done by anyone who can count from one to eight".". -~ UHll~Ull .m· mv. you can read about it. 'Hay.~""" '" '~a.rth. 'The f"TPY m"Tk"t< "TP." ... • +o .. is headed for disaster. a"a'yH~a. • _HVH. The nature of pattern anal ysis provides for a built -in method for cutting losses short. ll10 against the wave principle is its "complexity". . I") :'.

. Pursuing the analogy.. CHUppy UUl11\.11 nA" h' -_ rctvv "VCHHvU o UJ n .-1 onel mod . I' A The Wave Analyst Introduction /-4 .. '0 .. For people looking for short-cuts to success. For nn hoolnot r"rn t hr= rruvc ell''' . a new dimension to your trading practices will open up to you..11'. my endeavours with the wave principle will encourage the reader to do his or her own research with 1000minute and hourly fluctuations of the forex market until he or she too will u". The methods mentioned here in this manual are yours only if you care to apply yourself with sufficient intensity. no less than "IOV"'W vu'''' 'au"l0 la r urcc auu "'104ullIOU. .." m be likened to a Hawaiian surfer.Ll la" WIU"aL" uvauIJ v.el.. m >0 Tt ". In applying the wave pnncrpie. Hopefully.. vivid can help the analyst who does not help himself."vv'" . the more one learns how to "read' the characteristics of each incoming wave.n IQ.nt.still succumb to the disease called "opinionitis". But the occasional water dunk is the price onc has to pay to be a master of the sport... . ... th" fA.lUIO will be swiftly penalized where it hurts most: in the pocket. rAoel T. 'V" . Law" .h. The bigger the wave he tackles. the more chances of a "wipe out".deliberate training to be objective .-1p<rr. the more often one goes out to sca to meet the 'monsters". But for those who arc willing to spend time and effort to learn.. I sometimes have difficulty in believing what I see in the wave patterns. lav ulu. cspcciauy m the lace or seermngty contrary rtundamentar >!lUaUU' " Nevertheless" all these obstacles can be One nurnose of this manual is to provide the framework for understanding why the fore x market does what it docs. There is a lot of truth in the adage that "the worst enemy or the trader is rnmsen .a. this manual will be a disappointment.. IA .

' I I' A The Wave Analvst The fundamental concepts /1. ~" . (see Fig. Wave 4 corrects Wave 3. Wave 2 corrects Wave 1.. are now known as "impulse waves". \ m c:n ~_@ ~ =--.a '0' major movement untolds accordmg to a pattern at nve waves.' thp from W ave 1 3 1 / / 1) A /\ /\ V 2 / / /\ V 4 /\ \ / 1 V a b /\ to Wave 5 comnletes either a Wave ill @ or @ while the a-b-c sequence completes either a Wave ® or @..pnnpn~p.-= 5 ~ '" 1 rein" .-. Th.. $I 7 \' /\ b \ c (6) or (!) Figure 2 .' '" ~yy " D. or simply put.o"p . i ne "Iettered pnases are now Known as "~v"~~u. N.. a term popularised by R. 2).'. \it: • . _. 3) Wave 2 "corrects" Wave 1. «0 In a micro sense.. Precnter ana A. alter which the entire sequence is "corrected" by a pattern of three waves / 5) / N 2 '6' " /\1 \/\\ 7 £I.1 - .11 0 V"'V" J T... . V "' . " 'u~ c-o ""'P'Y " "1V~. a wave belonging to the ruev t hi ~hp~ tip~ ~f ".II~ •II IIui:lrnenull.Part _. formerly called "cardinal waves" by R. a wave of a "higher degree". 4) u In a macro sense. . while the a-b--c sequence correc s me emire sequence or ave 1 Ull UU!.l:'rost. The entire sequence of Wave 1 to 5 is "corrected" bv the sequence a-b-c . J. each of the waves in Fig. 2 may be broken down into smaller wave components according to the concept expounded in (3). the sequence of Wave 1 through Wave 5 completes . I I U \iU .. Elliott. '6' " J' 2) The "numbered phases". K.. Wave 4 "corrects" Wave 3.n:..~ .

@ 8) There are 3 rules which are considered "unbreakable": i) Wave 2 will not retrace past the starting point of Wave 1. patterns themselves. \ The fundamental 1/-2 -- . 5). ... or ../\A. 6) The basic rhythm of "fives" corrected by "threes".. 5 and 6 illustrate the "wave counts" disallowed by the Principle. Wave 4 cannot overlap the peak of Wave 1. wave 2 cannot go below the origin of wave I (refer to Fig.. _l__ _ V ~ ~ -Pic". Wave 3 is not necessarily the longest but it is almost always the longest. If the impulse sequence is going down. " ...F •• . not irrrmtl cive in n"tllrp (rpfpr Fi o til Figures 4. c CD ~I 2 ({ 3 I V\ / v c A b Af~A 2 /\ '!\/\/\A I. .F.4).. If the impulse waves are going up. . .zure3 \ iii) ~/ .. • T<' ~'J . . Waves may be stretched or compressed but the underlying forms remain constant. Wave 3 cannot be the shortest of the "impulse waves" (refer to Fig. In a downward sequence.. .® . Wave 4 can not rally above 'v' 'r /Y .""r.!:Y @ --- v5 "A ® y\" u) V\ © Fi.rt· It} .~. as well as the various rules and guidelines of the Principle remain constant regardless of the time unit used as reference. 161 the rtarrir-u Ia r i.tho "I'. / / N4 2 u /\/ / 5 3 A / s NT 2 concepts 1 /\ / / 5 -Picmrp Fioure 6 J J'v.e 4<> /\ II 1 1 !l 7\ T~ . Patterns in hourly charts are "counted" in the same way as weekly or yearly charts. In an upward sequence. wave 2 cannot exceed the peak from whence wave 1 o iginated.

.IS a Vmgonallnangle CD~ 3 (5) 2 (3) v _is Sequence i through ./V I . As in wedges found in 5th wave posiuons.L (4) /\ /5 4 1 V 1 _D / If_'! -{9\ / IV 11 Figure 8 L V / L\ V 2 / / / \/ V 1\ 3 tt. . Overlaps between the terminals of waves I and 4 are also frequent. a~ WH'"" t. '''''''UUUUU'''PU'Ov 'U'~O'""·~"'''6. Extensions mav also occur in the extending wave itself. these tormauons rndtcate tne termmatron or me movemem one degree higher.._j_ "" -Ll. . A 'vo~nlp T i c .Imuw "UVt \J / \ V / AI (2) / iVy A \'*' 3 ~ _L5 / Diagonal triangles are also found in C wave positions during the "lettered phase" or corrective waves. Usually. ..I A "" The fundamental concepts The Wave Anajy§t 1/-3 .m' id.. "-. itself part of extended Wave 3. 1) I A variation known as an extension may appear in one of the Impulse waves.• unpurse waves _L -" ~J . 3rd or StID-Most extensions occur in the 3rd wave.nancms occur in fifth wave positions usuallv after the prccceding third wave has moved extensively in a short time.>Li . although not obligatory. This is the only known exception to Elliott's " " . Fi~ure 7 5 CID wave ::. Expect extensions to occur in only one of the impulse waves (either the l st. like pattern formed by two eonverging lines. Extensions are exaggera co or etonga ec movements u a a e totally out of scale when compared to the other impulse waves. the sub waves in the wedge subdivide into "threes" rather than "fives".. in its usual form.. a. These .. ~.. an extended Wav~3 ''''" 1 /\ / <'<.r- in Fi oure Q c.f/® '6' ~ I vV/ \ \ 4 Figure 9 . ~.

It is a mirror image ofthc "converging type" in all respects. The 5th leg of the expanding type. occasions. Prechter in 1986 has sub-waves composed of five waves instead of the usual "threes". the 5th leg will fail to exceed the extremity ofthe 3rd leg in a "failure". This pattern was never mentioned by Elliott.A special type of diagonal triangle observed by Robert R. This type is ussually found only in A wave positions and is ® Figure 10 A rare pattern is the expanding-type of a diagonal triangle. however. Prcchter and Frost did not provide for this variation in the latest edition of their book "Elliott Wave Principle". must exceed the extremity of the 3rd leg to qualify as such. The fundamental conce ts " -4 .

3) A fifth wave sometimes fails to exceed the terminus of the preceeding 'Ird wave." " '5 'J' ~oH~rn' Corrective waves I) Movements against the trend are called "corrective waves" or simply "corrections". III "U V"11"" is very difficult.l':5I4I~ ~M~mvou~pw V. "-) :'5.~ . They are: i) ii\ Basic forms: zigzags.- ---- -. thrppc The complex corrective forms are further subdivided into four categories. This inabilitv is called somewhat uninsniredlv.----------------- --- .<V"o 1" '"'' r- i rrrrn rl ce "'" "p.1"- / .w . and gives rise to what is known in . This is because corrective patterns have more variations than imnulse waves. ."av P'" "" ."n h"t ic ""itf' common in hourly charts. A failure is a reversal pattern."vu~". " 'T'~ • . a "failure".. At times a corrective nattern becomes apparent only in retrospect. namely: zigzag complex.I -- h Th The fundamental - concepts 1/-5 . Sometimes.~t. • t.h Ar m~~ld nri~p ·. •J r- Foirh ror~. they are referred to as "consolidations" or "lettered phase" . .... that is. when they are completed and behind us. .n no.1111.~ --/\---~1-/ / /\/ V 2 ~. This pattern can be verified by noting that the internal waves of the "failed fifth" conform to all the three rules governing impulse waves. flats. flat complex and irregular complex. 3) A fifth wave "failure" The complexity of corrective waves can increase or decrease without "'U'""5' . 1'''''(. ""u '''''''5 - "vu """v"o . irregulars and triangles rnmnlf'x vfor-mcrlo"hlf'_t~ 'pc oron Iri"1. ' "l<'" 1\ 1 / / \ 1/~ \ 4 4) V~ \ There are several basic forms as well as derivatives from these basic forms.

6 .I Basic Zigzag corrections corrective forms I B Irregular corrections '\ c Bull corree tion Bear correction Bull correction Bear correction Flat corrections Triangle corrections Bull correction Bear correction Bull correction Bear correction The fundamental concepts 1/ .

'=' ... (1)) I t .- . / I It\ B VW\ ~ I I / \A V C AA /"'1 X---+-- ® /\ A -r V\ V A AI ~ /V \/\ / / ! V C .../ VV"J~ ~ X »:«. \/v~ ® ~ f---Zigzag I X I Zigzag---1 f---Zigzag Triangle I .( / f---Zigzag Flat A " The Wave Anslvst - f---Zigzag Irregular ---1 The fundamental concepts 1/-7 ----_ ./\ ~v "\ R.I Complex corrective Double-Threes ! form. I ~ Zigzag complex ! /~ B 'v'\./ I / / / /~ " /\ 'v\ V v A ® B "\V\ /(V V\\/IV \AI \1 c V A C X /\ A / AA B V\ I I ! 1· jI I / . B / I' / ~/~ V\ / \1\ V / / / r / / I / / / I !\" r: /\ ~~A ~ v ® I V\ IV A V\ c i: \/ '!_ .

8 .Flat complex 1 1 I ® B I::: f--Flat X-+---Zi za f--Flat Wave Analyst The fundamental concepts /I .

I Complex corrective forms Double-Threes B I B Irregular complex i r l' // .9 .X -l---lrregular---1 B c c f--Irregular A --+- X -l---Flat ----1 B l' I I I I c f--lrregular ---t-X -l---Zigzag --1 f-----.Irregular X Triangle The fundamental The Wave Analyst conce ts /I ./ / f-Irregular ---+-.

10 .rms Zigzag complex / " c f-----Zigzag--+-X -i-zigzag A c ---l-X --+-x +-Zigzag--j f--Zigzag-+-X--+--Flal -t--Triangle-------j ) I c c The fundamental concepts 1/./ Complex corrective f().

Threes Flat complex I l' i f---Flat --+x -t------Flat -~-X--t----Flat-l B f---Flat ----+-x --+--Zigzag -+x B B +-Triangle ------l I I f--Flat ------+-X-+-Zigzag --+x +-Irregu1ar-l f---Flat ----+- X -+-lrregular_+_ X +-Zigzag---1 .I Complex corrective forms Triple.

I I I / 1.Irregular complex )" I / / f--Irregular -+X +-Irregular -+X +-lrregular---1 f--Irregular-+X---I------Flat --+X +-Triangle ----1 A. I I c I c .

-: '-':.236. Example: 34 + 55 = 0. 10) The Fibonacci numbers. the length of Wave 3 In atlve wave sequence would be uy UI" 1"llgU vi rave .618 is 1.382.0 0 L. For example. Elliott considers these ratios to be the primary determinant of the pvtpnt rrf nr.236..5 .. "1" 2) Adding any two adjacent numbers will yield the next number in the sequence.. I"VHY\. etc.". dividing that same number by the number which succeeds it three places in the sequence will yield the ratio 0.618 is 0..L "''' • . Example: 34: 21 .382. The key elements are the ratios between the numbers in the sequence. 12) Fibonacci targets usually show UP as important levels of support or resistance even if they are subsequently penetrated. And.yu"u..)' . UI" >c. '. I.618. do not have any utility in forecasting the extent of market movements in terms of pnce and time.618.382. while the inverse of the ratio 0. .382. while the Fibonacci ratio~' pr~vide the tool for measuring the potential for any price movement.. while the inverse of the ratio 0." \ The fundamental concepts /I .) 9) the sequence.618 .236. UIUll uy UIC IC1IgU VI Wave 2.. ••• 1. The ratio 1 (equality) is an expression of the comparison between the . Example: 55 + 144 = 0..236 is 0.l 1.610. by themselves. The inverse of the ratio 2..236 = 0.rau.Fibonacci Ratios 1) The Fibonacci numbers arer l 1 2 3 5 8 1321. 3) After the first four dizits dividing a Fibonacci number bv the number immediately preceding it will produce the ratio 1. Furthermore.618.618.382 = 2. Example: 1 + 4. therefore 1 + 2 = 0. rather than adjacent waves. Example: 1 + 0. and the framework. 1 + 0. 144233 8) The inverse of the ratio 4. 1 + 0. vrn .618 = 0.236 is 4.236... L.13 .> rn • 11) The most common and most reliable Fibonacci relationships can be found between alternate waves.rp ~nrl t. Example: 1 + 2.LJU.1. 13) An important adjunct to the Elliott Wave Principle is the recognition 6) I) . and 1 + 1.618.1.0..618.382 is 2. And. Dividmg any +rnonacci number oy me number wrncn precedes it tnree I"""C.618.o 11$.236. ~ oaHU ~AU"'I"'" 144 + 34 = 4.): 1. Dividing any Fibonacci number by the number which precedes it two places in the sequence will turn up the ratio ot z.p~pntc in ~n" ~ 0. This is a very powerful combination..". rsxampre: • J 0. dividing that same Fibonacci number by the one immediately following it will yield the ratio 0.236 = 4.236. including the probable time windows for terminations of these movements. J .".236. dl vunng that same number by the number which succeeds it two places in the sequence results in the ratio of 0.618..618 5) = 1.. " ..~p ". Example: 144 + 6lO = 0.618.345589 377.

-.\ I / 1\ V\ IV \I A C = / AA B \/\ V C / / r . 11:1<•• As the reader will see from the preceeding examples.n "f ~ proportionately as the number of basic patterns ioin together.61I1A j I 1\ \/\ 1 ! I 1 I v\ / 'J '-'<:. To make matters even more difficult. VV C /\ \ VVV~L R A A r VV C I .618 A C = A .n"rp~<p< . anyone of the basic "corrective" patterns can incorporate the form of more complex figures.ff. r--o' P"'"'' " .n th. n~ttprn . .Part III Deviations I Deviations from mathematical Ligzag ratios] Deviations from the norm seem to be the rule rather than the exception in wave analysis. LA- C ~ I.l. Difficulty in this aspect arises from two sources: / ~AAA V A C-. 1· . '''' \ rv 'QV" ". • ·TTl_ • TTl ':l.alY'" 111- . such as the irregular./ l' HV111 u rc -v r.]1 1""V' v pal'" ~~ '11<:. .382 A L . .V1<"IVll -r- ~1.bll1A 2) Substitution of the simple type of correction patterns by one or more of the complex types....1\. The following examples Will Illustrate rhispoinr: ./ . flat or triangle In Its own corrective wave.""lh. the degree of r!. I I 1\ \A V\I V ft /\ / V\ V 1\ B \\/\ V C I ...

] Irregular B ~.t:I ® c= Triangle ® @ / .5I5L fi •.W "'" t . / / / /\ V\ ~ A /~ \ /AI V\/ ~ N ~ ~ \eI /\ /\ d . / 1\ / / / V\ V A 1\/ \1 / V c . . ! A L / \11 A B \V\ / A---1/\ ~I.618c i.illil h e=1..618c / I f / / / I \ VV I\~ /\ / \/\ @ VV vV / \ 1\ / I / l' /---- @ L.618c -r nA J\A \/ I.618 A /\1\ A t 1\V\ /rJ / V ~f./ l' Expanding triangle I d- lil!l" e=.I Deviations from mathematical ratiOS. I d- .1.W~ "'" Cd) / V\ A 11/\ / / / / / / ®-H Deviations v\ / J "'\ I The wave AnalYst 111-2 .1i1Rh V C e=.

1 / B -+ Triangle c c B -+ Double-Three (flat + triangle) .IISUb~titUti~~OfPattel'~:~1 B '.

4 .Zigzags ! / c Deviations II/ .

5 .ion~f.patternsl Irre ulars B / /' I B B / c c -11 5 A -->Flat B --> Double zigzag Deviations 11/ .IS~bstitut.

b +Zigzag c -s.Irregular c a 'Flat b --> Zigzag c --> Flat d 'Zigzag e' a .Substitution of Patterns Irregulars c Triangles / ~.Trian le B -e.Zigzag d --> Irregular e -s.

/ x --> Double three (flat + zigzag) ® x -+ Irregular c x -+ Irregular Deviations 11/ .7 .

Substitution of Patterns Double-Threes B --> --> A Triangle Irregular c (a b c A c "abc) ee / x -+ Irregular / 11/- .

t'SUbstitution~f Diagonal Triangles Patterns I B @ A B Triple zigzag into a diagonal triangle --+ 5 C Diagonal triangle Double zigzag into a diagonal triangle Diagonal triangle at Wave A and C @ .

•• ~1... The subjects are classified into several categories.. The rest of the time is spent on corrections. £. Some of these observations were 'T'L.1 . corrective waves are more closely related to each other than to the Impulse waves. fal l into 'hi> o~"'. especially those reflecting the aspect of Fibonacci ratios. lime 1) There are no time constraints on market patterns. u11: ' . '0" h..~lran..' <H" 'HW' 0 . . 5) r. pages. some of them are provided under more than one heading to give an easier cross-reference. Waves belonging to •. 1\ tendency may . a tendency. Turning points in the forex markets are easier to recognise as they D('(."_ r'alllY .1. In subsequent pages we have attemprea to categorize guidennes and observations under several headings. • U there isno law that says these relationships cannot change.~. ... Until the evidence is in.. and are supported by the completion of an acceptable wave pattern. ~'6 • d.~ .. The best way to benefit from these guidelines and various observations is to adopt a criticale attitude.. own experiences with wave analvsis. Wave Analyst Guidelines and other observations IV . are mere tenaencies nOL permanent relationships cast in concrete.~ • • • ~L _.-.+ •• " "r- •• .. Frbonacci time muitiptes are msutncientty reliable tor use 111~VI"C.. 4) ~owever.a~ti{)n< of tirne ~11r1 nrif''' -~". . • .~. '" P""'" <11IU llVU1\H> VI <au. 2) In terms of time spent in completing a pattern. 1\1 Guidelines and other observations ·.1.Al"'''''H''''. But miscues also occur sufficiently enough so as to diminish the value of Fibonacci related time targets. I urrrirrg pomts do occur often enough at Fibonacci time targets to be beyond coincidence. only 30 to 35 % of the time is spent on impulse waves.:oI11"" '... ..d>Clll!.. It must be remembered that many of the relationships between waves. f -". app I icanon 0 these rules daunting to the beginner is the added complexity of various guidelines that are supposed to be there to make life easier for the wave analyst in the first place. "right size". 3) . a tendency should be treated as just that.' ~ . What is common now mav become rare when the market underzoes a maior cvclical chanze.IIT ifnT. area. mv.. Tnany five wave sequence.

the trend has probably changed. _j_ . This makes it imperative for an analyst to recognise the onset of 3rd waves (before the fact) as they offer Immensely prontanre traumg opponunllies. • _if_ imnnlse move)..u Oll er OU'>"'I va"v .618 times the length of Wave 1. terminus is a veritable trap to the unwary analyst. they are almost always more powerful technically (i. investors find new reasons to buy in the case of bull markets. ~~•• . If the vertical • . By its nature a 3rd wave is the most destructive of all impulse waves and should not hug a trendline drawn between the origin of n... '-' " J A \ . If it is not shorter than Wave 1. •• • .vu "O~_"'~"6'uv._ll.'cl.618 is not a Fibonacci ratio) ...e_ 'l. However.~ lenzth.1 '. Third Waves 1) The endinz noinr of the 3rd wave is the most difficult to forecast among the three impulse waves.t "J -J . Wave 3 mayoe equal to.... +.618 times the length of Wave I (3.sro wave.sro wave". the next objectives are 2. which normally resists the idea of a trend reversai.~.~: U''-' '''U''-'uw" uu ••~. Since by then the economic background heuins to irrmrove or as the case rna be fundamental reasons pile upon technical considerations to make 3rd waves as powerful as they are.- . L . your wave analysis is almost certainly correct.Ws the 1 nroif'rt irs lerioth as 1. . it is likely to be a 3rd wave.. the most effective way to use rate-of-change indicators with wave analysis is to downgrade momentum readings until a suspected "3rd of a 3rd" >u The thrust of 3rd waves can be so' powerful that they are often mistaken for 5th wave "blow-offs" or "sell-offs". 7) __Oru:.. but rarely so.~ . T£ H . a. or sell in the event of declines. or LOlli nmes me iengrn 01 vvave L 10 me case 01 -"'.hpn it i~ lik"l~..~ -_ -- ..ln~.. If Wave 3 extends. usually changes Its nunc uunng tne . VI' 'n 'h:r'nrp"i"'~: ''-''-'H.. Since the 3rd wave can be shorter than the 1st wave.e. If the thrust occurs in record or heavy volume. higher volume and stronger momentum).~. The highest volume will USUallyoccur in the "jrd wave ot a . """" 1A _- 1) In so far as the aspect of momentum durability or "staying power" is concerned I st waves have nothing_to_llfove. predicting it.t· r' . .. . Third waves are not always longer than lst waves..rrl U1~Vf' f'Yr... It is almost always steeper than the 1st. Compounding the situation is the fact that 5th wave "blow-offs" or "sell-offs" are not all that rare in the forex markets. possibly extended. The only possible indicator that can make the distinction is volume. .618 or even 4. ~ " 5) 10 6) 2) One of the most effective wavs to recognise a 3rd wave in a five wav sequence is by its slope.-. 'U' 'u However if Wave I kicks-off to the accompaniment of a prominent divergence between your indicator and price .e._.! Impulse Waves 3) . 4) The general public.o be a 5th wav~ "blow-off: or "sell-off'. .u.. Therefore.Cn. . In trus pna.Q _c" 'u 'U 'J'-'=''-'''-'uv.. experience shows that it is often represented by an almost vertical line.~ "'-'J . It is only 3rd and 5th waves that have momentum standards to meet.

Wave 1 and Wave 5 will tend to be equal III terms ot length ot pnce travel." terminal 2) During 5th waves.-1 h~vp i.10 . Tnthf>event of an ""tf>ncion thp mi.-1. ThIS awareness shows-up first among the market protessionars wno are closely involved with the market on a daily basis. When the 5th wave deve1opment stops short of the Fibonacci related targets.u" Ui~u" recognise as they occur. . "'U''-''"V'' auu "110 1"". Extended 5th waves happen for 35% of the instances and the remaining 5% in extended 1st waves.-1I" the ""Tel wave of the "Tel of wave" usuallv marks the centre of the entire 3rd wave movement. Tnthe forex markets. it is one of the least understood phenomena under the Wave Principle.~. R.111.J15L or 0.. . usually tum out to be 3) As exnlained in Third Waves section I 5th waves are usuallv related by a Fibonacci ratio to the price travelled from the origin of Wave 1 through to the end of Wave 3. Fifth Waves r '1'. 2nd or the 5th) to be extended. expect the subsequent correction to target the area of the 2nd wave.~t ""1. wavee 2) lfthe 3rd wave is extended..0 ~10" 1 kl5( tim"c ac Ir-m ons W~V~ 1 Thf>~f' ~l. Most divergences between lIle airecTion or momemum . a series of overlapping waves at a point in the wave structure where horizontal triangles or diagonal triangles are not expected.U' '6' chonl. instead of the usual 4th wave."''' "fUT.~"" _~1_ AT" 5) 4) Fifth waves reflect the element of bullishness or bearishness which has been building up continuously over the preceeding four waves. ~ . unwary analyst by surprise. tl. 'Y U~6H JH.. . This is esneciallv true if the 5th Wave in the sequence is smaller by far compared to the 3rd wave.. or equal ill tne length or time taken oy me movemem Hom thepointoforiginto 1Il" '''l1UllIU~. "'to" 'XT~•• "'. often times the B Wave (of an irregular pattern) of the ensuing 4th wave of a higher c. '~CCllfT1f' w"v~c 1 and " are n~ thnt extended.-1" " rurt :11 '>BOO ". a deterioration of the momentum picture becomes evident. comes last. '1 Uo~.0 C"(ln"n~" "vn. .. as usual. 6) '\ J The Wave Analyst 1\ n .. The typical relationship m a tive wave sequence lstlllS: wave) IS V. The length of the 5th wave may likewise be obtained as a Fibonacci ratio of the price travel from the origin of the Istwave through to the end of the 3rd wave.mnnlcri (either the 1st.4' 011.-1""l1v "tonn".'-'" "Y "110 ••101011 JIU '"V~o.... . . . r . Extensions <" +1<0+1r 1\ Tn c rrv f. ~. . II . The general private investor.. But based on market experience.618 times as long as the price travel from Wave 1 through to the . When the extended wave in a sequence offive waves is the 1st. The extent of the 4th wave may be derived as a Fibonacci ratio to the extent of Wave 3. "'" of thf>. A succession of first and '''''U1111 waves Ul resseramrresseruegreegerrerany 111. Elliot did not lay down any method to tell in advance whether a wave is extended or not. ~) 4) Awesome as extensions maybe.N._t. about 60% of extensions occur in 3rd waves.. UUI"'" ~ • +1-' 'b '.

rule under the Wave Principle... the Principle of Alter. •• ). The more consistent alternation process occurs in the extent or depth of corrections rather than in its patterns or forms. itisalmostalwaysthe last pu" "0" -r- j_ L 2 flats or irregular patterns.T DI1' "h.6 or 50 percent of Wave3. '1. Principle of Alternation 1) The Principle of Alternation despite the appellation.may De uu. It.8 oercent or more of Wave 1.lIle ruternatIOn of patterns may take place. Y = 1.. lion. Market experience shows that the principle holds true for 90% of the time between waves 2 and 4 in a five wave sequence. then Wave 4 would very likely retrace 38. 9) If the 5th wave extends in any five wave sequence. then Wave 4 whould correct 23... but not an unbreakable.6%' corrections rarelv exceed 38. double or triple threes) in Wave 4.2 percent of Wave 1.r"". _ A .u from time to time..7) Corrections tend to be milder within extensions. 11) waves wurnn an extension may De mggermscaietnan r- me preceeaing 5) In a triangle.-. a valuable guideline. sideways correction (flats.618X N Y 4) if Wave 2 has retraced 61. POT instance This principle also requires us to look for different formations in double or triple-threes.J. 3) In my experience in the fore x market however.. . triangles..2 percent or less of Wave 3.h "~"n" At' nA~"n_ • I' 'I' 'I' D 'J" 1I... irregulars. lDJ When Wave) IS extenucu.. OUt significant exceprior . Expect ahigh probability of a 3rd wave being extended when the 2nd wave retraces less than 50% of the 1st wave. the most common pattern is a flat and a zigzag. 8) "Fl . in about 80% of cases this five wave sequence is Wave 3 in a larger formation.. ri '0 l cr" n~tt. is just that. double zigzags) in Wave 2 should give rise to a complex.2%. Its iengtn is very orten l~mes--m:eentire price travelled from origin of Wave I to the peak of Wave 3. In a double-three.etc. A simple deep correction (zigzags. the principle entrusts us to look for different patterns between the adjacent and integral legs. -r-r. .. Leg A will not be the same as leg J::S. Ifatriangleoccurs. See diagram below: occurrence of simple and complex corrective patterns in Wave 2 and Wave 4.. . J::S Will not Deme same as \. The usual retracement oercentaze ofthe preceedinz wave is 23. ro. If Wave 2 has retraced 38. This tendancy increases .rn r .. A "..

if in doubt.8% corrections. 4) Elliot enumerated eight types ot corrective patterns. and then let the market consolidate for as long as it takes. the second wave / r"'\ roo .I Corrective waves and retracements 11 MpthNl.618 to the length of the preceeding impulse wave. Elliot was never able to define precise rules for anticipating the more lime-consummg corrective patterns. underlying strength.irnnlpd ""mniptprl C'. the damage to the prevailing impulsive trend is usually limited to 38. 'pncl 'A h~in rr nri"PO h~"lc .2% retracement. trying to read in it any olimmcr of confirmation as to the course of the market. '0 hn' 9) '2 . but are quite common in 1Il" nuuny aBU I V-llliuUlC uuar " If the correction starts with a complex. below the bottom of the first!in a bull market). R. the first approach is unavoidable. 111"". Traders generally look at therally" (i. II) At the start or a tum-around rrom a u. l11<1jUl decfirre..11. used to nredict the extent of corrective waves under the Elliot Wave Principle can vary. . 0. Lei "'Y p"~""'" ~"u do not occur as frequently as 61.. Similarly. The double-three pattern is the trickiest corrective pattern within the Wave Principle. . .uauy wv. irregular or a triangle). "nri .5 and 0.o. The l st wave sell-off is often touted as another opportunity to buy cheaply..236. 0) ~'r" j. ana men 00served that they may double or triple in extended sideways consolidations..2% of the preceeding movement indicates a pent-up. a... sideways pattern (a flat.1. • . u "J r-ratte t-n in with the Princinle of Parsimonv (Occam's Razor). or exceptionally to 50%. Double-threes are infrequent occurences in the larger degree. But for the investor the second would be more appropriate."'~Ii_~. i. The termination of a zigzag pattern does not guarantee that the correction is over since the retracement forms can take up complex :. within a B Wave of a "zigzag" correction. stay out. the second zigzag should end well above the peak of the first in a declining market.N. ns The Wave Analyst IV-5 . 'n. 0.•• p ". 5) 10) In double zigzagging patterns the second zigzag should terminate • .382.e. One is to watch every price "tick". Conver sly. 50% retracements are very common in the internal waves of bear market rallies.. "'. For analysts. The converse is true at the peak of a bull market... Elliot also stated that the simplest pattern is likely to be the correct explanation most of the time. a consolidation that takes some time to finish is a prelude to explosive action once the corrective pattern terminates.' . thp ~rp" of the nrevious 4th 'r wave of one lesser degree. .'h". The other is to step back. and usually to just beyond the extremity of that 4th wave.'ngl 6) lowest point from whence the 1st wave originated. decide on a strategy.+0 __/ 7) A retracement that fails to ao beyond 38.~ tho . Follow the maxim . .e. It is the single most common cause of a flawed forecast and ill-timed expectations. but the underlying approach involves the application of the Fibonacci ratios 0. However. This is generally true. pu""u. even if the correction lS a Znd wave. Wave 1) as another opportunity to sell on. are LWV "'Y' lV U"<1' IL • zrrrrzrrrccrrxxrm W "00' degree..

070 Or 1II0le 01 yvave 1..~. V - . . double-threes or triple-threes. Fundamentally. .. percemllrlIllOlllllt:).1J Ihatis Wily the trading of 2nd waves should be avoided... 16) If a5th Wave failure occurs. then the Fibonacci targets are alIIlOSl 2) ""H<lll11y "VI I""'. Dr' ~nL rI. If the slope of the projection derived by tms method has the same degree of steepness as Wave I. the ensuing correction will usually exceed its target by an amount equal to the deficiency of the 5th Wave. 17) When a five-wave sequence falls short of an ideal Fibonacci objective. But even the usually reliable Fibonacci ratios are of no help in predicting the ending point in advance. This trendline. "'1. the analyst may project the time frame where the Wave 5 is likely to peak. 111" " 'T'C ""HUIHle "...~ ~uu through the terminal point of Wave 4.. . Usuallv.. Fai .11l11" case . . irregular..0 VI ill" " . LLeIIUSl\Y 15) The most tvpical retracement Wave 3. 4) It is also generally true that if a trendline break occurs in the 4th wave (usually as a result of a triangle ). Given the 'rr Forer-act where a 2nd timinz reference the analyst should be able to deduce what pattern is wave should end.. (as . (flat.2% of the length of The trendlines are drawn through the orthodox terminal points. "11'" lili" rs=crrzrwrrrrorrr . This is of no consequence in the Elliot Wave channelling method.. then the ensuing 5th wave will also oreaK me oppo.£en '. should provide insights as to the point in ti rrrss". the market appears bleakest at the bottom of 2nd waves in a bull market. wave break.or double triangles. 111S""" ". trendline • .. terminal points of 4th waves will breach the trendline " .c.inrlm" mhprp the 4th wave correction should end. It should not be overly difficult to recognise the terminus as it is occuring. for Wave 4 is 38.h.( Channels and trendlines ~. A parallel trendline is then drawn from Wave 3. The specific purpose is to determine the probable ending noint of Wave 5. '" 1) An Elliot Wave trend channel is constructed by first drawing a [me at the 2nd wave peak of a major market decline. If the 4th wave enos aoove or oeiow me trendline . O"pnorollutha '~r 0< rh at of fhed. fi paraue is then drawn from the end of Wave 2.. tives. . in conjunction with a pertinent Fibonacci ratio. n~t nr~"irlo wrrv . All that Elliot can offer is projection ofprODa6fe stopping points. while the economic situation appears the brightest '" -r-a." retracement is 50%. .).\ n ~ .-nO" for ')nrl m~"po to h. the P' 'ith wave will commence immediately after the breach. Guidelines and other observations IV-6 J fne\ " ave nays . wave 14) Wave 2 normally retraces deepertlfan retrace 01. countertrend rally is viewed as the beginning of a new rally to new peaks. likely to occur in the 4th wave. " ..J. the ensuing retracementwilllikely me maxlmUlll potential Vi llle "VW ~ P~"~"" target 3) Occasionally... e . wave 'I. especially in Waves 1 and 3. rlromn from Wo"p 1 throuoh Wave 'I. It may happen that a portion of the price activity may lie outside the charmel drawn this way. As before.c renuune connecting the terminal pomts or waves 1 ann . simnle (a zip-zap.. using Fibonacci derived objec " zizzaa) and 4th waves to be complex ctc..


A normal 5th wave should be able to reach the channel objective. Failure to attain this objective is a significant sign of the potential strength of the subsequent retracement.

Flat corrections


R.N. Elliot once observed that a market which hugs the innertrendline (the lower one in the case of bull markets; the upper line in bear ,.t.a'.\ ~"t.a· f"r nrornMi" rnrvvs-c on"p thp ,rn "'~ II" null' awav
frrrm that trendline

If the corrective wave begins with a flat, the worst case is a .618 retracement of the previous wave, even if the correction is a second wave.

and starts headinu

for the oooosite




m a na co


n rc IOllU V1'." ,,,VIO '"






1"111" T

.• L v


;n n.


A channel that tapers into a "wedge" is about to end.

shape is a sign that the movement 3)


that may be found in forex market movements.

If Wave A in a flat correction

failed to retrace 38.2 percent of the adjacent impulse wave, Wave C is likely to be a "failure . Given the

Determining targets and objectives
I) Attemptmg to determine a pnce objective in aovance is userui ill several ways. If a reversal occurs at that level, and the wave is valid,
~J' '1'

above situation, if Wave C has retraced at least 23.6 percent of Wave A and has already completed a five-wave sequence, it is likely that




If a pattern starts with a 3-wave structure, and subsequent market action rules out a double zigzag, then the correction will very likely trace out a flat or an irregular formation, as a complex correction;


One sure sign that the end of a major trend is approaching, is what I call the "multiplier effect". This is the sudden raising (in a bull market) or lowering (in a bear market) of the speculative objectives
01 the prevanmg


A flat formation irregulars,

is considered


so are


double threes and triple threes.

Irena, usuauy
.. ,c.', 'vu'"''

oy several oegrees


u rc

cur rcru

I'"~'" 111101'111"~'y








small private investor.

The ordinary


is usually "sucked

in" 1)

nf'.or or at the end of the maior trend. Bv the time he is aware of the

It is extremely common for C waves in irregular flat corrections

market move, all the professional

traders have been and gone. This is

often the catalyst for a rapid tum-around. 3) When various independent . -,
,'"'" .UIOUl1,",' .

to be 1.618 times as long as A waves (Irregular corrections are very common in lorex markets, especiauy m the iu mmute anu nour y cnar S). Wave B in an irregular correction is frequently 1,382 times the length "fW~"p A TfWaveBis 1.618timesaslon 'asWaveAormore then tendency is for Wave C to end at the same level as Wave A.


project a specific and more-or'J ,1" In h







A ,~,,,~.

r.:, .

"nri nth"r





.: rl -.




An irregular is considered a complex correction; and so are flats, triangles, double threes and triple threes.


9) The concept of orthodox tops and orthodox bottoms must De well



--\j_-------\T .&

understood to be able to accept the proposition that bull and bear markets do not necessarily end at the extremities of price movements. R";pf!v nn nrrwnrric five-wave <p.l111pncppncis ar the coniunction of the fifth waves ~f several dezrees (the so-called "fifth wave of the fifth wave of the fifth wave"). Usually, this conjunction marks tne extremity In pnce. out II rne ensuing co ecttrm UI uic errtrre five-wave "~'i~~"~" l,,",'" rue lVilli v> an irregular pattern, then by definition, the peak of the irregular correction (Wave B) will exceed the orthodox top. The converse is true for anv five-wave sequence going downwards.

\ ':
I hI 51 t;~p, c c Irma






Wave A. On r;r~'occassions Wave C may be 2.618 times as Ion;' but only if Wave B has been more than 1.618 times as long as Wave A.

Horizontal triangles
I) The triangle is one of the most reliable forms under the Wave t-rmcrptc. Its appearence IS pracncauy a guaramee mal me prevailing trend will continue. A triangle is a holding pattern which separates two waves in the same direction (Waves A and C, or Waves 3 and 5). So therefore hv inference the "thrust" from the trianzle is the last movement in the prevailing trend. It is normal for e waves of triangles (the last leg) to exceed the triangle nounuary line in a raise oreaxout.. owever, D Wave, never eJl.c;t:t:u . . u r c.' C.' 'H~~A<'~"'~ I' '0 "0" "6'


It is also fairly common for the distance between the Impulse wave s peax ana lOpor wave D 10 Deequai LO tne dtstance uctwccu rue cuu UI Wave A and the bottom of Wave C. Barring equality, the relationship between the appendages is likely to be a Fibonacci ratio. The normal retracement of an irregular correction is 38.2 percent from the orthodox end of the adjacent impulse wave.



a DUllrnarxe irregtrfat
. ...~


u rc UVllVlll v>


bear market irregular correction. 3)



r: 'T'~

"'V" '"'.,





If the pattern starts with a 3-wave structure, and subsequent market development rules out a double zigzag, then the correction will very uxeiy trace out a nat or irreguiar formation.

Apexes of horizontal triangles usually provide significant support to any decline after a major upthrust. This comes as a consequence of triangles being located in the 4th Wave position in any five-wave

J '\

r::.. ,,.;, .
_. ---

/\/ _ R

The Wave Analyst


Corollary to the above, if the first corrective pattern to evolve is a horizontal triangle, then one can rule out further development into a double- or triple-three. The thrust that follows the termination of a triangle in the 4th wave position will generally be of the same length as the widest part of the




Alternative waves within symmetrical horizontal triangles are usu-

the ratio of 1.618. 5) The principle of alternation within a triangle warns us to expect that no adjacent waves will be similar in form. When the triangle comprises the entire correction (rather than only a


entire correction can be situated even in the 2nd wave position. 7)
If a horiontal triangle occurs as part of a multiple three pattern, it can

the more extensive the subsequent thrust. 11) The extent of the thrust from a triangle in the B Wave position is


as in the e-eoc Vi UUH aHU U"aI '''''''''' . " "ou '1" C Dr'. If the tirst zigzag has retraced less than )U percent or the preceeding impulse wave.~ \T V C A V\ V C c:. and as long as a suspected X Wave has not . the second zigzag usually finishes significantly lower or higher than the termination of the first. 7) There is no reliable way to predict the occurence of double-zigzags... 1(1 . In double zigzag formations.)'. TC. '''''1'''''''' Oi... u~~u . • '" 7:" IS :J) In a GOUDIe tgzzag. See following diagram: Zigzags and double zigzags 1) Zigzags and double zigzags. thf'rf' is hioh nrobabilirv of a double 7i 1'"7" occnrino 4) J I ne\ wave 1\ ~' AnalYse /I.. H '1' ~H' .~ .".2 percent of the preceeding Wow' A Piftv nprrpnt occurs less often while 61.618 times as long as Wave A. ..n nPT('pn' or ror"h..~ll / /\v\ An J ~ A /\ fV\ .):. expect the last leg (Wave E) to be relatively smaller m scale than WaveA. ' .)' tV oc co'!ua.pnt 2) In the forex market the usual relationship in a zigzag correction is for Wave C to be 1.. / / / / 15< ') nPT(.' . <. a: 0 3) However. '0' . Wave B in a zigzag normally retraces 38. ~'"'' chapter). lU UI" '""15''' Vi UICO '"' '''VCO.ll] ~""l'v'" L~!5L"!5' " 6) 12) If the first leg of the triangle (Wave A) is no longer in time scale then one should normally expect from the dimensions of the preceeding sequence.Theretorc. "" u.. The second most common relationship IS tor Wave C to be equal to wave Pl.. X waves in a double zigzag often reach the same level as the preceeding B wave.. the subsequent thrust rrorn the mangle une L vvave) ~'b~b' ""-COl. ' " di oo-rnrn ~h. especially when the deep correction is at the 2nd wave 1'''"". uie z . lie wave can LaKt a.. .".'''''' i c n<. percent or more of the Immediately preceeamg impulse wave. often referred to as deep corrections tend to retrace 61.8 percent retracements are rare.

. 6) Do not expect the 5th Wave of a diagonal triangle to terminate exactly at the objective trendline. n.r .-1."nrrlp: o"rllrwhpn the ~rp~pp. its impulse waves areflves . In some rare cases however.-~ Diagonal triangles . 2) In a double three or triple three. no. its internal waves are composed of threes. 7) When a diagonal triangle is in the 5th wave or Wave C position. as it most commonly is. a deep correction. ..LU oe tu ues ao lUll!!> ". But when it is located in a Wave A position.~ " Substitution of Patterns -e-+.JI. This can be inferred from the observation that .. The occurrenee of patterns other than diagonal triangles in C waves was not discussed oy Elliott. the diagonal triangle usually exceeds the end of the 3rd wave.· ~. '5' '0' 11 2) in" r: wave mav be substituted by a diagonal ~ f. It is likely to overshoot or to fail to reach the '<. IV-11 ~~- . horizontal triangles generally occur as the last form in the pattern. ~) Within diazonal trianales Wave 3 is usuallv 0.~. effectively connecting two or more simple forms into a single complex formation.~. r crv c. The reversal normally retraces back to where the diagonal triangle began (terminus of Wave 4). a 5th Wave or aC Wave). irlnlin. But lillie diagonal pattern tails to surpass-wave -'. As a5th wave.1.A ~L \ 8) ! "y.1".. ~ sharp r""pr<~l frdlrrwino a diazonal trianzle usuallv takes the shane of a zigzag or double zigzag. expect a quick and sharp reversal. 4) 1. horizontal triangles can also occur as X waves. =rrrarxcrrras UCCI1llCy'UCW cuuub" 'v .1110'" ". may replace the five-wave sequence. triangle. 'l....uu ~~~-l'u' '6' tenets of wave analysis. .e. However."'n"l tr. ". r.618 times as Ion I!' as Wave 1.. out ooservanons or me pllenomenoll inthe lUle}\. ··h i c . like a double or even triple zigzag. positioned at the termination of the larger move (i. Eighty percent of diagonal triangles occur as the 5th wave of the 3rd wave of a larger degree..nIT move in the same wave degree has moved too much too soon ."" "'.010 .here IS a strong tendency ror me entire oiagon:IT11ilIngr<.

razor is a . 1:. Those which serve . r'omcare suggested tnat tne seiec ion is maw.. "This is a true aesthetic feeling which all mamematician.0. or are worth much. UJ wuai ne CaHt:U lilt: "subliminal self'. nise them? Choose those that seem simple. cumbersome and practically useless..."P ask: which facts are likelv to annear? The simple facts. or rather to avoid the trouble of making them.1 Poincare said. Usually. the facts by themselves do not suggest much. and which a pure intelligence can grasp.pH. It is this harmony and beauty that is the centre of it all. Success in using wave analysis is not merely a question of applying rules.' "JO . urar cvunc: . or the complex elements are indistinguishable. rfe mean classic lJCaUly. Jules Henri Poincare who lived at the tum of the century. of geometric elegance. It is when the facts merge with the matrix of the wave structure that harmony. we are likely to meet this simple fact again. we can use his guidelines in determining the heirarchy of facts that should lead to a proper "count" of the wave structure. Uut Vi vhich n rc l'iVHUl" ale .-pussime LV vcn rzuu '.. and therefore success.1 . P~:.""]' ':n .. they must be felt rather than formulated. Know.~~. . science or mathematics. Mathematical solutions are selected by the subliminal sel f on the basis of "mathematical beauty".0 M 0 '''reT'' rum-rl-se r. otherwise known as Occam's Razor. of the harmon y of num hers and forms.ACU "" • Vi rrrrcts: The combinations so obtained would be so exceedingly numerous. a'buwyu' lUi The nrincinle of Par simon v . an entity that can be likened to "pre-intellectual aware". This IS no romantic beauty tnat r'omcare was taucing auou . rr-irro "" .1 ch"n~p rvf rc»r- .1 '".r- '.u I .1 . either alone. . Either this simplicity is real.."f solutions to a nroblem but onlv the interesting ones break into the domain of consciousness. wrote in his "Foundation of Science" about determining which hypothesis or which facts to examine in situations which "admit an infinity of others". As the fourteenthcentury philosopher William of Occam puts it: "Non sunt multiplicanda entia preater necessitaem" (Entities should not be multiplied beyond D' In . or as an element in a more complex fact. The rules that must guide the choice are extremely fine and delicate. order It is this sense of beauty which should make an analyst choose the facts that contribute the most to this harmony. Ifit is real. 1l noes not mere y maxe me must .Part V Practical Guidance ignorant as often to be tempted to smile". anymore than. How to recoa pher..r "\ A The Wave Analyst Practicel nuidance V. nut star! wall me simple ones. uccam'. .vm U1y of the parts.. 'orp . Poincare suggested some rules in classifying facts leading to a mathematical hypothesis.1. It is almost Impossible to state them precisely. say. the more relevant it is.• >. 1 1 . The true work of the analyst consists in choosinz amona these combinations so as to eliminate those of limited value. holds that when tossing around explanations for a natural phenomenon you should opt for the simplest theory that fits the facts. With slight modifications. :~h t. The more general a fact.

d) anxiety. they enable the analyst to see better the little Change that may happen near his point of reference. Be intellectually honest. so treat it as such.ti.Its proper to begin with the regular facts. we find that in these extreme projections our wave counts are overturned. This makes wave analysis confusing stands that the apparent complexity at times.t'pnMcM h.. But as soon as one underemanates from the multiplicity of possibilities because there are too few rules. And we choose the most accentu ated differences not onl y becau se they are the most striking. UUl '"11\. then the task of looking at likenesses (similarities) becomes less daunting and can even become enjoyable. -0 • • the greatest chances of failing: assume either a very large movement III pnce or a very large movement in time. You can no longer amve at a sound wave count. e) boredom. d The moral of the story is obvious. the reality is that the market is not conforming to that count. and the more you think about it. LI " . Then its the exception that becomes important.. It is outrageous how an unclassified "squiggle" in a chart can totally defeat your "perfect" count. Almost always. What you need IS a nypolllesls. ~J' 0' • ak I' 1'°· mind is already racing ahead to what should evolve..v u. Do not "gloss" over it. _£~". the analyst's sense of values and atutu es are more to blame than anything else. But looking more closely. later on to stymie Pr".J. It is normal at this point to feel like tearing up the chart into little pieces. there is no significant progress. so It u es a Itt e ume to realise that this unclassified minor annoyance of a "non-regular" pattern is not just irritating and minor.1pn nn. luis is uie Lew moment of rationality. b) inflexibility. lOIIlallt:l. but differences. bu t also because they are the most instructive. These "upsets" are important. a11U >111111<'_' d a .1: 111. It has stopped you from proceeding any further. -u-r- to tell you what is wrong. erl:101C uie 'AIUB' • W1VBIO. Its obvious what IS wrong. ~. c) too big an ego.r- common If we focus on each individual rule or tenet in Elliot Wave analysis the collective rules and tenets seem to be discordant at first.. we will see III general that they resemble eacn omer: oirrerem so nroblern of all.u. Resolve the situation because it will surely resurface your efforts. but after a wave count is thp fort. You are now completely stuck. For the analvst this is the worst of all moments.../ mskience V-2 . What we are trying to do here is less the ascertainment of likenesses and differences but rather the recognition of l. However. You do not need anyone W' . now LO classify we recalcitrant wave paLLern. the more vou are inclined to throw this book into the dustbin and forget about the whole concept. Reasoning out is no good to you now. A reci tation of a plausible scene in wave analysis will illustrate the point. The most common contributors to failure are a) lack of persistence and intellectual honesty. in conformitv with it becomes blase because thev no longer teach anything new. So the "squiggle" must have a valUe. A) Lack of persistence and intellectual honesty An ascinna wave analYst needs a kind of "stubbornness" that is en- gendered by intellectual honesty.. . and t) impatience. You think about it.u m .There can be no short-cuts in wave analysis.~ VW~' V~ 'H~H l'~co. -. So we seek not resemblances.1pT onnOTPnt oli"PTl'pnrp.. the unclassified wave pattern is a problem.

Watch it the way you watch a line while fishing. espi e rigorous 0s dead-end occasionally. This is to see if the things that you thought were important really were so. You will have to search for new clues. given the normally volatile forex cash markets. This is a capability borne out of experience. persistence and intellectual honesty. The difference between a good wave analyst and a bad one is is insufficient. and then reason disinterestedl y A Poin A rigid set of values often leads to the inability to assess what one sees. obviously the solution is to find the relevant fact or set of facts that will enable you to put a label on the wave pattern. When this happens. reassessment. You have to have a sense of "correctness". it can not be developed inside the lecture room where the concepts are only imported rather than "discovered".If one finds oneself in this situation. If ou are not flexible. even undesirable. a revision is required. and. That is what will pull you through. Passage of time usually allows the solution to assume its true importance. the solution to a problem often appears unimportant at first. Just live with it for a while. According to the "doctrine of objectivity" we should keep our mind as a blank tablet which nature will fill for us. One of the key requirements of a good wave analyst is this ability to atientl select the relevant facts from the irrelevant ones.3 . it is betterrto consider the event deliberately and go over ground that you have been over before. and to quickly recognise those errors as and when they occur. but before you can find em ou h ve to lear our head of "old" 0 inions. As stated before. Before long you'll get a nibble. given enough are a wave analyst. en is oes no appen. you may fail to see the real answer even when it is staring you right in the face. If your values are too rigid. Practical guidance V. a new fact will come the mind-logic plane. it becomes very difficult to learn to accept you ow w a e even ua ou come wi e. a feeling for what is right. Your mind. and to just stare at the chart. understanding or "feeling" is only acquired from practical experience.

. you re ego comes m ror rougn treatmen . when made. .1lan:a:IY'" is the real reason you find it hard to get started. ~ . T ~" .~r .. the is to feel like doing nothing at all. . YOU. Often. ) T~ A. If vOUknow enough analysts to think of them as a group.'-" ~ . then yourego is boosted when the subsequent events prove the analysis ~.C) Too big an ego Tf ". If modesty does not come easily or naturally to you. U a~1111>l""'C'. As well ". .UJO':~:J" c~· u. no. When false information makes you look good. an analysis."uu '''' UU< '~"I'U"'U . r ou re arwuy s being IUUICU. . r-rurnfc Von mill no' nppel rp]"hpllinu ' Read everything . On any wave analysis. than any false..ho'. 1Ci1Il'crSUIli1IILY. When the facts show that you just goofed. but just as I and countless others have survived. Practical guidance V-4 ... "" VU" 11"" b"11UIUC1Y " ICC" uau " . label the waves in coloured pens in as many ways as possible. -'.. its Just that the personality . ip slter-nate iumn to wild conclusions at a terrific disadvantage.:i11discover term.~ H' ""u 'T'h -0' =r . D) Anxiety of vourself then vour abilitv to tendency When you are so sure that you will do everything wrong. hp. you're not likely to admit it. it responas . '6 "6' . the work seems to make them that way. . Anxiety which results from over motivation can lead to all kinds of excuses stemming from excessive . will tend to confirm your original underestimation of yourself.tPr 0 .• LI:CC: '. h. These errors. in the end. one way out or arrange t~em III proper seque~ce.or! on 'm~h<oi " certainlv not in the 10nO' When beginning can.1.~p. . and your observation is the same as mine. new and hardened resolve is enough compensation for this. but It does. . .. H is a painful! learning curve.~ 10 is your have gone through the same leammg curve and have all mace errors.. "!.Mc . Your ego isolates you from reality. • . but generally if they are not modest and quiet at first. . • • •. The more you read the build into vour analysis. I nere COUla oe cenain soothing if twisted mental benefits. 1e-U1b"II1'C uie '"5''''' ~'u "5"'" The time spent this way is much more productive a blank chart. You can reduce your anxiety by recognising than time spent staring at the fact that all analysts I was going to say that the market analysis does not respond to your personality. If you deliberately assume a mediocrity.hp rrmfir!pnr'p you can on wave analysis. There are exceptions. a hioh evaluation recognize new facts is weakened. hpo. 'm. I think you'll agree that analysts tend to be rather modest and quiet. all of us have to pay our dues in terms of bruised egos and lowered expectations. These false images are deflated so rapidly and completely by the market that vou 're bound to be very discouraged very soon if you derived your staying power from ego rather than from a desire to excel.. '" J' '0' and build all kinds of rationale into the analysis.. This will lead to further errors and into a self-stoking cycle. ~~. I reneated hammer- blows.1 yuu.. prepare as many chart copies as you then lIliiL " J in'" 1""l<in" ". blown-up personality images your ego may conjure. .n" r~~prt Tn t h ic wsrv vrvu "<on 1<ppn zoinz motivated bv the success until vou overreach vourself again. "J lUU Will Ll'CO aUU J"U' . The makinz of a wave analyst follows pretty well the same procedure. you're likel y to believe it. '''''I'U''''I. this rather than laziness. au au~. as yuu organise ii1IU this trap is to fake the attitude ot modesty anyway.h . on the The best way to break this cycle is to work out the anxieties charts.. However.

When that is done successfully. stop. You can never be certain what kind of pattern will tum up. boring tasks that. ... . Y supporting work such as momentum analysis. must be done and for the wave analyst the worst is in making a current analysis fit the main scenario all the way to the beginning of a sequence.u'-"'.. There are. but not quite the same as boredom. On the first sign of boredom.' .. " .= . whilst immediate goals must be scaled up . dlldIY"'..''-.. then most other things will follow naturally. and your analysis IS vuTneraDie..d"""'~ <VU~'" ~'v . it seems such a waste of time. .5 v'''~. knowing that the penalties for sloth will sooner or later be great.~. This is a small price to pay. '0' Fr . Cr. W hen this occurs there is a rreetrto lU"US your mind • .. T "ll"HD'LC. Boredom means that you are not seeing things freshly. •• J. """. '" "Iv .'-". The best remedy for me has been coffee and sleep. almost alwavs stems from one cause: an under-estimation ofthe amount of time the analysis will take. anu rrgtn action !-"VUU'-'. This is particularly true when market action has settled into a lazy sideways consolidation. If you do not stop then you will become susceptible to making a big mistake. or by doubling the alloted time when circumstances force time planning. Sometimes.nnf' tbin c to rio when workinz with charts as in many other tasks is to cultivate "the peace of mind" which according to Poincare "does not separate one's self from one's surrounding". Do something else and call it a day. This is almost similar to. It can also be prevented by scaling down the scope of what one wants to accomplish. however. etc. If the daily pattern happens to be part ot a sequence stretchmg back several rnontns it becomes easy to become distracted. IIIIt"cn' . t:'St:WIll"t: lUI a 1'. as with all professions. Kight tnougnts prouuce riglll anions. Boredom plus a big mistake can lead to major losses." • r wun' WIIIUl-wn:rut'" .. or preoccupation with other aspects of .. But back-tracking is essential to the understanding of the current n~tfPTn Boredom is usually a signal that the analyst is taking things for granted. po.n~' nAt ~'>r~f'" 1 It is best handled by allowing an indefinite time for the task. Peace of mind produces right thoughts. Overall goals must be scaled down in importance.1""'.. go through what you have done I::: Wave Analyst Practical guidance V-5 . rJ •." before at least twice.' • .. IVll'V' .&' T1 E\ Boredom This is the opposite to anxiety and is commonly associated with ego problems. When you are bored..

home..('p n"t mh.. They will react to similar situation in the same manner over and over again.11 "f "'''N.. namely arrogance. from the song "Serpent's Reach" impending involved in this zero-sum game actually understand the mechanics of price change.. its not unreasonable to presume that players And in comolacent ienorance we've sown the whirlwind seed.n of price change. the October 1987 stock market crash drove this painful lesson " I. This last sin is one that nobody needs to suffer from. it is enough to know what does not cause pnces to fluctuate. uie basic J 7". There's a price for too much arrogance. 'II" Trariina PI. oil r1PMPM price movements n. But the moans of victims who were zero-summed in their trading accounts at some point in the game is actually on the rise..LLY UII. \ A tvrvir-at ~//ir. it a tool IS workable.Part VI A Tvplcal Elliott Wave Tradina Plan There is no way to smooth the swings except by changing the way people think. It suffices to know that the Principle is based on the proposition that the market is comprised of people. auu wherefore': a. greed. and that people will never change. and speculators who tried to will the market to go their way before it is ready. a nrire fnr Inn much oreeri: amount The sin of ignorance is the most pervasive of the lot.. There are not enough of the cocky traders left to make a mark on the casualty 1. For instance. but the most common causes of trading disasters can be traced to three cardinal sins.. Don Simpson. behtrrd n is understood.w VI - 1 . Even if the causes of price change are not yet fully understood (nobody knows exactly why people decide to buy or sell en masse at a point in time). the incidence of the sin of greed waxes and wanes with the rise and fall of orices in the currencv markets. It IS not of over riding as LUUg Importance UUUI to know 'fLy'. This is especially true of the Elliott Wave Principle. did not survive this far. and ignorance. changes. like an epidemic On the other hand. With the of money beinz shifted "ronnel M the sliahtest nerr-em ion of market IA.XdI. So one is tempted Errors in trading occur due to a variety of reasons. And that is an even more difficult proposition than eliminating greed III tne marketplace.hlp r- 'irrtr=r-vc c hptmppn l volatilitv in the forex markets has taken its toll Traders who n~"sl1mf'el to possess the inside track on market movements.. the laws of cause and effect in the science of physics do not apply in the largely psychological ~rp phenomenon r~nrl"rn.11<11. In another.

analysis IS the door toTalJUTousnones. and from these rules broad guidelines and description of tendenCJeS can oe mrerreu.. it is simply impossible to pinpoint the confluence of specific time and price elements at any part of a market movement.. -0 Thprp '. Elliott has done is to establish nonnative behavior patterns from which specific rules can be declared. Any analysis derived by application of its principles will always Imply a rorecast or predictton..ri. IAI.N. The first requirement of money management is a trading plan -a written well-analvzed sten-bv. Its like boarding a car without a steering wheel.. .~rl rn~n W."H. it does not tum base ideas into c It should immediately become ODVIOUS me use ot J::<.th""t hr~lrp< . . ~.steo process. One soon learns to replace these terms with the word anticipate./'v. it must also provide contingency for taking losses and accepting profits.. ...'1"" "C11' UT.. rUL u us way. --0 ..t nnp r» ~n ~~1 ." do not use it to forecast or to predict.0 1. The best way to use the wave principle is to accept this 1< IV "U. Use it only to establish targets with high probability of achievement. . But it is a fact of life that most predictions and forecasts are destined to fail. but it is doubtful if you will arrive at your destination.· ~" . H".rp nn guarantees in the forex market. ~ fpm rl"rlnction< that will irlpntifv thp mnsr . . while money management is ine Key urai upens LIJaI uuur. .. . .1I10tt ave mat w Principle is not a mechanical approach to the market place. It is an approach in whichprobahility rapidly becomes the catchword."". Given the hizhlv serialized structure of the model a study of Elliott Wave Principle will train one to assess the probability and frequency of a future event. . . .vvruw.e _C '=III' If one is to derive maximum benefit from this method. is not having a trading plan at all.. >h~ f. not a set of vague intentions kept in your head. It is not a magical philosopher's stone."" .voovo ... To a certain degree." 1V' W'" .. l' :~'::. 'Joe. This plan must not only provide for entering trades. of course. The worst. .1 .m.nTn'. lookinz for riuid absolute answers to the forex markets' questions.." . It is doubtful if In .vt... a tool to proville the mput necessary to quantify the degree of risk or degree of reward in the current market structure....n.likely path that a bus will take (even if one has not made the trip before). ~uv . 1"<lU VlLlIUUL i1 . it is a method in which the tprrn< nre dir-tirm "nrl irvror aetin o hecome irrelevant even unwelcomed. thus eliminating 99 percent of other possible routes across unpaved lands.~ct >A exnl icitlv recocni 7P that marker mechanics do not cause chances in market direction.I • •t v'"'"uu'".'p'''''plvuaUIJ n. A A tvoicst Elliott Wave Tredina Plan V/-2 ."U UI..... or to establish alternative courses if subsequent market action nullifies the original objectives." "HV "'"U5'"--urITI' "1" rr. '" .' ... this quantification process -lets call it "money management". c. one has to learn to accept it for what it is. thereby limiting the possible eventualities the trader has to cope with. Prechter once . Situations which are deemed impossible under the various rules and guidelines are eliminated from consideration. there are only maybes.~ _~t~_t. . only changes in psychology do. .. n rc . "0 "<lUlU!. UonTler me tmpuea rum imo explicit. and gearshift. What R. To use an old analogy.1- v. Robert R. vnile -" . :'''. Specmc market acmm can rnen ne UCI'VCU i roru urese Thi c rna rli<~nnoint thoce who "rp. You will certainly be able to depart. 1' more important than the analysis part of the tandem."U1UH5 ._'" v. '-J lmm"l~rlo~ -0 ' u.

"<Oltall1 11111<0' 111 UI<O IlIru . from the standpoint of Elliott analysis. '.~ \/1 _ ~ . its spirit should be what Robert Beckman once said: "We are not trying to beat the market. even when the forecast was wronz. UU IIUI "1111 '" ~"'"I1I~ ""UII"'''' IUI"'''''>L lUI "'~U-UUU"III~ I"''''UII'. Rather... Ul1~Y cu.r r- ~I • Ill'. There is no contradiction involved here. or vice versa.. ' ~ U<O' ."" J J In drawing up a trading plan. Most of the time.h . . With meticulous planning. We are trying to join it. . possible to assess that being long is preferable to being short. WUIU'. that information is usually enough to succeed in the market place . ." There are subtle implications in Beckman's plea. .. aim at making money on the trade. : j' '\ . T. The objective snouiu oe less m nemg ngnt out more m oemg sUCCeSSfUl'In otner . /\ I ne wave AnalYst tv Clli.~ Pbn . the probability of likely occurrence are so evenly distributed that favoring one scenario over others becomes a :~all<01 .

A_ .

4 .i daily momentum analysis for decision support. I A typical Elliott Wave Trading Plan VI.


Weekly Price Chart Continued long term momenum analysis. .

. in percentage terms however. will depend largely on the capacity Divide your trading capital into 10 equal units.v c expected five-wave move should be part of a larger pattern that could be compnseu or five waves Itself. .:. -o-rc .t. It can range from 75 to 125 points in the tick-by-tick chart to 200 nfennios in the Lone Term 1JSDfDEM chart. the maximum net exnosure recommended correspond to about two-thirds of your limit. the Trading Plan may be activated.. uie wave schemes. . On the other hand. the potential movements Just make it a point to remember that are limited in this case. 2) setting-up of stop loss levels. medium-term.1). 4) provision for partial profit-taking..n thp nf·. In tms weal situation. .n the> h~o. ua>!>. Ll"UH1~ '. of the trader to take losses. The nominal value represented •. Vll" scheme to the next. Preferably. ·". and 6) termination of trade. if you are trading on ~~'" 'r " risking his entire stake in anyone trade. it might take all of 7 or 8 months for the market to travel from Point 0 to Point T on the Long Term Wave Scheme.c nf. only the time horizons example the time of travel from 'He very-snor '''''H. hgnlr fnTPV trader).. ~1 r: a~. IH"~ t ltV". 3) case-by-case addition to existing position.a In A typical Elliott Wave Trading Plan VI-6 . if you are taking ~~cp All of the trades described in the Typical Elliott Trading Plan follow a certain pattern. and will have the .. by the leveraged capital is irrelevant system.. ... if a larce ziczau or anv otherdeen is exnected from the wave count." l~1U'~H. in the trading DIan should Finally. yVUI th. . the smaller the risk in terms offace value. For Point 0 to Point T in the Verv Short Term In A .l u~~"'~'u" ' . ~ 'HlU .""Il"'" . if a choice is available.)' r c. sethe Wave Scheme might be as short as 18 hours. ure SHUl -terrn. namely: I) initiation of trade. However. me move rrom i-omt I M1UUIU 'Ulll1"UY"-WdY" u iu rUllll 1 ~'''1 "H"'SI Wave of the larger pattern (see Short-Term Trading Plan).rl. the risk in trading in accordance with the Very Short Term Wave Scheme should "4U"lU'''">''~. This also ensures that the trader will survive errors in judgement early in the trading exercise.. this typical Elliott Trading Plan maybe used with any of the lour wave scnemes rnenttorred. The shorter the wave scheme being followed.r. . The tactics won't vary sigof the recommended trades will differ.. and the long-term ni ficantl y.. Anv choice of oc ' ' .Hn~ to the over-all scheme of this money management li~. trading horizon.Preparations for the Typical Elliott Trading Plan Ascertain from the preceeding wave count that a five-wave quence is highly probable from Point 0 (see Trade No. wherewithall to continue the trading plan. 5) case-by-case reinstatement of posmon. (~" . .

./\ number ·T." . Sell 5 units ~ ~ ... -.. ---._.I Trade Maximum . ..TradingthelsrWav~<1 3. .\b / \ 'I /~\ \... ... ..NnNn. P 'I.\Q} ~oln. \ . . 1." on Units committed in Trade No. .......\ I I/V I~~ I \ 4 t\ ! \. .. .8 percent retracemeni of Wave 1: Stoploss : Reverse of Trade 1: If Wave 2 falls bellow Point 0. on... ..l \ 1/.'b"D "'.f No." '~M"'" II v \' a V ~ ~ - \ / ? A- \ ________ Major support level \jI ""'~ Th.~'" Point 0 . 1. / l_ / / / /\ / \ / / / \ \\ \QJ ~ V fA) ~ / \/ \ @) /\ 1\ \ \\ \ (Cl .._" Sell 2 units' Ieaoino 1 unit in case Wave CD "extends".. .".. llliJi 3 units 6111 ... . \. \ \ \ In.... 5 . "f trade- at 50 to 61.1 . .1: Units remaining after Trade: 3 1 (3) ~ \ \ \ CD 5 \ \\/ /\ \ j~ .

i ne prooaouny ror apeak or wave J may oe caicurateu oy rakmg me . . wrncn is to recoup losses from Trade No. uruts IUlIllJStne expressea objective or tne reverse order. .. -r-t. being net short or L. it probably erred in identifying n. Turning in a profit from the reverse trade is welcome.1. v.ntO .~ _ UHU • VU" v." ~) ... 'T'L yU'pvo~ of the net short position is to try to recover all or enough of the losses from the long trade so as to prevent the capital from being impaired.nrl""rl m>lrl" th"nrlrl<>l:th>llP'.:~: '" Wave 3 and therefore the rally from Point 0 is part of minor Wave 4.•".u.. 4) When the upmove from Point 0 has completed a five-wave sequence.>v'" An. If the analysis was wrong.~. . Leave one unit long in case a low-probability extension occurs at this phase. ~. The downside profit potential....n 'U'~v'~U""~ 'c 'U'UO . Refer to Part IV for other methods on how to predict ending points for 5th waves. 'u. c' is an "nrl.~. Upon retracement of 50 to 61.>/ ..618 and adding the product to the termination of Wave 4.~. buy 3 units. 3) Remember: your analysis indicated that Point 0 is probably a pivotal point.n(tn~i~t~~~':. 'H.8 percent of that rally. sell 2 units. Y"" u~" _~u "" p~u" v. w.c: 1\ • l- wac .. Lets call this process the Fifth Measurement Method. In this situation.r . but not of overriding importance. ~~'~'v' . A bigger stake on the downside is unjustified at this point. - I A Th". "'v" multiplying it by the ratio 0. ..Trade No. is therefore limited and should be traded as such.1 I) A sharp rallv usuallv takes off from a pivotal iuncture like Point O.. thereby terminating Wave (D as well. . namely minor Wave 5. ~ . Place a stoploss-reverse order just a few points below the level of Point O.<:t A typical Elliott Wave Trading Plan VI-l .

.i'\ (5) Units from Trade No.Tradina the 3rd Wave I POin.._ \ \ Major resistance level \\/ /\\ v \ / / \\ I \I A II . 3. where the ralh.- .r.m "'''.V ~ \..." if the market falters and nwves back below the peak of wave 1....\ At 50 to 61.2: ". from Wave ® equals the rally from Point 0 to (j). ~ ~ U"''''' "woe . leaving 3 units in case Wave ® "extends" / / / \ \\ /\ /\ 1\.1: ~""~ vV"""'''~U '" Trade NO.. V) U""" "'''6' LV} II / j\\j!' /V I . Sell 6 units (C) 2.. ~ Midway stopprofit oJ mue o. .\ Inital Stovloss: Reverse of Trade 2: Sell 10 units -- . L. 4 fv1ajor support level .1) .2 ..2: Trade No 2A: Units remaining after Trades 6 10 3 l'artlUl pro~tt raKing: Sell 7 units.. Point 0 .8 percent retracement of Wave (j) :B!l1/. \i_ .I Trade No. 2A: Critical point. 1/ 4 V \\ / \ \ \ Trade No. 5 units Total number of units long: 6 (5 + 1 unit from Trade No.... V_-----TradeNo..

~ OJ •. 0 • u> ~ . th~ tAll~:'" . o 5) 2) Put in place a stoploss-reverse order at illst below the level of Point O." .618 . "(lU.. The order to reverse can now have more aggressive intentions relative to the first stop loss order. "m "" . "v"' BV.. 1. The termination of Wave Z or Wave ::1: mentioned above should be followed by a downmove as damaging '" UII' he-wave rauy projecteu rrom r'omr U to t omt't .". Call this Trade No. even a relatively small movement falling below Point U "lUUIU snfftce [0 recover any JOssincurred on Trade No. 'nO~· oh '0 ~o~ fr~". . . Commit the entire stake of 10 units .. been labeled as W"Vp (1) neak could larger degree Wave Z. fr". 2A.' . as is rne case ou percent or the lime.. even if they are situated at the same level.2 1) When Wave:2l has retraced to 61. f it was followed by a drop below I Point U. . the level where the .8 percent of Wave CD. The open position is now a total of 6 units long. sell 10 units. f Wave @ I extenos. _ • •~ ' . .1'\ The Wave Analyst - A typical Elliott Wave Trading Plan VI-8 ." If the market moves higher according to expectations.HL ~.. contingency plans to preserve some of the profits have to be in place. .If the order is elected._. • ~ .. n.. 4 more units.~ ~ "'-IU"" we Ul""JJ\.h reason for confidence nt th ix rim» tion: a minor five-wave sequence has terminated in the previous upwards pattern... ~ traveled hv the lImnov ... The upmove from Point 0 to the Wave CDtop should be correctly r: . gC'tngll h" th" iru r "f When the price has exceeded Point (W) by the equivalent of 10 nercent of the cli<t<lnt'P hphvppn Point 0 "nrl "uri "fWg"" IT'.>~H"v tr-r-rn WU<H uu. This brings the total number of units Ion>'. h .. sell 6 units to square off all positions. The net short position will be4 units. '.~ If the statement in 3) is true. or Wavc q. 'U".. but also serve as gambit in a new trading plan oriented downwards.Commit up to 60 percent of your capital in this particular trade.. The reasoning goes like this: There was a five-wave sequence from Point 0 to the peak of Wave 5 units. . the ensuing drop below the level of Point has a long way to go. 3) 6) . .. There is nothing more that could be done rationally until the market unroius turther.618 times as long as Wave CD. .n P"int 0 Tf 'h .a. There is now sufficient grounds to expect that Wave@ will be at least 10.a..". Since 3rd waves are generally the most powerful phase in any five wave 4) .V. -ru U>.<. .~'o~ 'UIO' 'V. It will likely be 2.=~.. n "Jr. (nat IS "'J '''~. The most critical point at this stage is located at (W).Trade No. So even if a major expectational error was made in projecting the continuation of the move to Point T. Il IS ueSlntUle to be very agressivc at this point. -0' . / .". +0 h that level then drops far enough to overlap the peak of Wave 1 (in Wave @). lJllIy seeK' ro lCleVU!' ""Y losses from the upside trade.. then It ISalmost certam that the original analysis was t1awed. Then stand aside... the implication is mal mere snoutd De at least one more five-wave sequence to the upside emanating from the end of Wave ' .~u H"'O~>' '-lcallY...

_-------_. use me r utn m easurement tactnoa 10 carcuiare me probable end-point of Wave 5 in Wave @.~..~} I The A Wave Analvst ------ __ A typical Elliott Wave Trading Plan .. VI-9 - .'" tmel". 8) Sell 7 units at the expected peak of Wave 3 Fifth measurement metnoa.618. then add ittothe bottom of Wave '®..· ~r" wh at it .~ 'u~ .. project the probable terminal of Wave @ by using internal and external wave reiauonsrnps.~ " .2 and No 2A ifthe market drops unexpectedly. ' ".multiply it be 1.~ . the most that can happen is that you will break even on Trade No.If you placed the stop profit level at the peak of Wave 1 (as suggested above). . Measure also the distance traveled by Wave CD. All the trades m. The whole trading effort has been geared towards this big moment. ._------ --_ . leaving -' units lOng La taxe aovantage UI a lIigll-pruoaoililY ~ . '~11 about 7) When a sequence of five waves take shape from Wave ®. .. t •• r!: =c» Thp. The orice obi ective nrovided bv this method should not Vary much with the target obtained from the Fifth Measurement Method.

8 percent retracement a Wave ® : ~ lfuJL 3 units if Wave ® is longer by f. _.3: 0 Trade No 3: At 50 to 61.\ \ Wave ® (refer 6) \ \ \ Ideal Stop loss: Reverse for Trade No. © Point 0 .4\ \.Trade No.3: .3· Trading the Fifth Wave Units remaining after Trade No.

. The stoploss-reverse strategy can therefore be very aggressive. . UI oerng has a very nign i "'" There is no hard rule being invoked here. pattern.iiru uptolfiunirs. large degree decline de~t'rihprl in item 4) is for a small irrezular correction to be ending at point X (this argument is technically in error when the larger The ideal stoploss-reverse order for Trade No. or a double-three). w 1111' v""." t" uv~uurl thp re-ak of nrecursor Wave @. auu u au gained bLVUIIU' 'Y quickly. .<:. the probabmty or runner rtectirres diminishes LV U degree. oh'. This contrived stoploss level will onlv be effective if the pattern of Wave @followsoneofthe sideways correction patterns (i.. an irregular. ~ . D.. 'J (E. ir Wave \0 nao neen extrtrorrtirra i IYsrrorrg.' m'rlrl1p 'J .no> Wave @. If the decline which is being labeled as Wave @ drops below the peak of Wave CD.. . the likely Iimit of the retracement .. Wave@isnotlikely to extend. y aratioofl. Therefore beinz overlv ontimistic of the upside potential at this point is not justified..' 'en u ·"yv = r--' " . ~ J I I /'\ A typical Elliott Wave Trading Plan VI·10 The Wave Analyst . a fiat. VII rrrcrrcr 11) ~ ~ J . m.2 to 50 percent of Wave @. Being aggressively able.rraue c I) NO .the premise of .3 should be placed just below the level of Wave CD peak.' .8 percent retracemenToT cave '2). or degree decline which should travel way.~m. way down the chart..618 times the length of Wave CD.618 b or higher.and Wave @ has given indications of following a SO percent retracement or less relative to Wave C. orlongerthan Wave CD. Moreover..Wave ® ." -r- . its development IS liKefy to be normal. Wave ® has higher chances of turning into a failure.r- nhocp Afon pvtpn<l.Q • . the only remaining argument for an extensive. point X becomes a criticaljuncture for any rally to new peaks.e." HT T'l-e= rrrrrnr-rvr= to Wevp (3) "'1' <hAll1<l -fore he more annrooriatelv classified as «zizzaecotrection. Wevp 0~ 2 "<:0"'10 ". 'i) Tf Wove @ was extended (i. ~ D. With a 3-wave count from the peak of Wave @. 4) long at this phase is therefore reason- 6) If the drop from the peak of Wave @ can be established definitely as a three (composed of 3 waves) rather than a five. 3) If Wave @ was less than 1. rr tne stoploss-reveres level is rJil. even desirable.' cr'.618 times as long as. Beyond rhis point..>~~th '0 ". it is at least 1.3 . The basis for a limit below the 61. a triangle.618 times as long as Wave CD).e.8 percent.8 percent retracement is the observation that if a correction pattern starts with a sideways ~. one of Any drop from the peak of this zigzag is therefore part of a large- steps is recommended: fu!y3 units if Wave @ is 1. 1. 2) The reasoning for the above steps goes along this line: If Wave @ was longer than Wave CD. ..h is 61. as the odds for an extensive downward move IS very rugn in trus suuauon.:J After Wave @ has retraced the following i) 38.n.. which . then a stoploss order may be placed at the level just below the corresponding 61. long position in Trade No.

pnrl.. The peak of the larger structure Wave ®may be similarly derived by applying the method on the peaks of Wave@ and Wave @. (3) . u. In -- A typical Elliott Wave Trading Plan VI.. It may be the case that Wave @ will eventually extend..-. uu WIC "". Or what has been described as Wave (Q) peak may actually be Just the mid-way pomt 01 a grossly v u vc '-'V.11 .~_ .. "~I".. 'u '11" n:m u • .h". r-" tho U"HH". The peak of Wave 5 in Wave @ may be calculated by using the Fifth Measurement Method. And this is as a good place as The peak of Wave 5 coincides with peak of the larger degree Wave @..IC IOUw"y V11'-'1VVlllb 'II" a "l<' !'''''''' "A'''''U''U of Wave @. <til .cenario is n"Qat"rl annronriate conditions to trade the correction of the movement from Point 0 to Point T. U) v c vc ''''fU''II'''' "'l' . The name of the game is taking profits. ~_ . 'v neak . if the market rallies Wave -. _.hl. It is desirable to side step the short duration but generally destructive effect of the correction's resumption. if not all.'-''''''u . at a certain point paper profits have to be turned into hard cash. relationships. In this hypothetical example.n. the peaks of Wave 3 and Wave 4 all in Wave@."b • then the irre oul ar correction .nn n.p @ h" intprnol onrl pvtprnol n.""p .degree wave schemes are being traded). <tIlU stand aside. If the market nas gone as rngn as me peas or wave _. a plan to preserve some profits should be in place once the market has sufficiently moved upwards. There is no longer any excuse for keeping the long positions open.I"". VII"" a 1 vc -0 '0 -0 9) At this stage the trader has probably exploited most. it is very likely that Wave @ is not over vet and that the corrective nallem (nrobablv an irregular] will probably bring the market below the origin of the adjacent upmove.or wave ~. OUl sunselIm:II". '11"" ~ .xro.I"'" nmh.r UIIJl' . 7) As in the earlier trades.. . "[.. of the potential of the five-wave movement from Point O...• ".t -J' _? '"b' V . at any of the levels where either Wave 5 or Wave ® are expected "~11 .u1lU"U.. t- 10) So.. "'onrl 0 irlp onrl \XI" it For-.. . However..

5 At 38.4: u.i"t T Units from Trade NO. ..m" . @) '-= \\ CD V \/\ A \ Point 0 \\ // V / / \/ V /\ / / / / /\ \ / Critical point: wrr"'"'i-ive-wave p..4 (g) . ~ -.." }' Termination: nositions -\- omrr 0TTfrTT. C. '- ~\ from Point T. A'OM no Z ---- 3 '.-- [Trades No.n' rnnh~c / / /\ \ / 'J\ '\~ \ . ~/ C/ \ I '\\/\ sequence!. j ... / of7 units 1 I. therefore..3... . 11" .v .ave .r... \/ b .:::y 2. om /.".2 percent of the 'HUUW.J D".3: Units commited in Trade No. \\ \ Trade No. 0 Units after termination of trade - -3 0 .2 to 50 percent "retracementafWave (a).Trading the Corrective Waves I 1..j """"-~ ~71\i .ny. \~OSSible zigzag. \~ \ . B1111 2 units leainnc 1 unit iorcomoletion of Wave (c).«~ vv. deep correction.. sel~3 unT 1 / rr-. / Stoploss: Reverse for Trade Nn .1 Trade No 4 At 50 to 61..5 f2\ \:::!. «ev ..I ~.II 0 .4 and 5 .8 percent c r. or at a point where the drop from Point T has retraced 38. .. ® ~UIl'"U' \ rA\ \3f .l\/i \ 4 a A.

r".0 nercent of WllVI' rm SI'II reliable way to predict where third waves will end. full retracement of 100 percent is not unusual. Tactics are therefore adjusted accordingl y.8percentofWavel.4 and 5 1) When Wave 2 of@hasretraced50t061. ttl There is a lotoftruth in this somewhat facetious observation. Many a pause suspected of being the onset of a 4th wave correction eventually tum out to be just that -a minor retracement in a roaring 3rd wave extension. Since the expected decline is a mere correction. The market spends about 70 percent of the time in consolidations. Side-stepping corrections of course mean that the trader will be idle for ~Ar~ th~n h~ If Af th~ tiITI'" Th"." lose it trading the corrections. a nat) is too high for comfort. It is normal for second waves to retrace 50 percent or more.u: 2 units.. leaving 1 unit to take advantage of the hypo'<r. Point Z confirms a five-wave sequence from Point T." '.!l!. reverse the position by buying up to a maximum of units. probably a zigzag. and therefore that of Wave @as well. while impulse waves take up the rest. Trade corrective waves if you require. although a large one.8 percent ctracemcn eve 0 wave tgi if the stopross is erected cover ill. The rationale is this: If the counfofthe minor waves can not precisely produce a five-wave count (as it often happens in short-term wave schemes). .! snort I The Wave Aneivst A typical Elliott Wave Trading Plan VI-12 . Qm:: a maximum of units. sell 3 units. 6) Move the stoploss (no reverse this time!) to above the 61. . The bottom of Wave 5. .L percent retracement level IS a very logical action. But are reasonSfoil1avmg your skill in trading corrective waves. but proceed with extreme caution. Ifthe stop is elected. Puta stonloss-reverse order iust above the level of Point T. If Wave 3 was not extended. the profit potential is limited. ~ ~~ 7) Finally. or". ':. when a five-wave sequence from the peak of Wave (j)) has taken shape. The size of the stake depends on how the length of the previous Wave 3. L'. Project also the target for Wave © by assuming equality between the length ofWave@ and Wave © Cover _" . way be calculated by using the Fifth Measurement Method. The retracement pattern of@is likely to be a deep correction. 3) Notes on trading corrections ~.horo 0~rr00'.Trades No. I aking some proms at jiS. as in second waves for example. 2) 8) Wait for a new sign of a rally to activate the Elliott Wave Trading Program through another cycle. compute forthe likely trough of Wave 5 in Wave© using the Fifth Measuremenl Method. At the projected peak.."~ "~"O' can be extremelv profitable. 5) When Wave (fu has retraced 38. then then probability of a sideways correction (for example.. c itu .". .2 3 more units.. 4) from Point 0 to Point T.

1 .7650 area. The price action leading to the bottom of wave B was expected to were actual recommendations made on the Reuters and Telerate networks rin i k I during this time.7650 or. Applying these various rules. this will help prepare the beginner to the realities of forecasting wave analysis. The Elliott wave outlook Case Studies VII . tenets and observations on market data.The learning process is further facilitated if critique of the performance is provided. the next step was to determine the structure and objective of the ensuing C wave. It should be appreciated that Wave Analysis is an ongoing process of deduction and evaluation. The easiest way to learn is by looking at examples. is something else. One New York anal yst had even proposed that the dollar was about to drop into a "bottomless pit". of B should not go far from the 1. wave analysis lows of January 1987. What you have just read is probably more wave analysis material than you would care to know. Once the terminal point was identified. O's.8750 . The prevailing sentiment at this time was one of extreme pessimism for the US dollar's health. Hopefully. Reading it was easy. as the favored scenario called for. with the expectation of making money on the exercise. it may be seen at the lower 1. Wave A had conclusively ended in early March at 1.Part VII that comes the way of the wave analyst from time to time. the period in been seen at near 1.

.u l~(\ .~~ ur ~ " ~Ilrl 2.000 L~LLr~V III s ~~~'J ~ I .3.1 cr.~ lJ. r\' J\~ ""- rrl _rltl~r CD I '1i.j'~11 '~ ~ %. Ll IT. T ~...\.Lin TOT' I'veel\.~ ~ W· l"lrl . . rrlrrl~rl/ '~ltlW~ll lH 2 ! t\ rrt .~~ JJ .500 1.May 87 '" "'i\. 1984 1985 1986 1987 1\.v.. r 1 ~ \n.1 3.ty June 83 .. .-uvw-'--==7 IT t: lIT '. 1 .000 f r~~lT t _I) ~ ~ ~ (iI1 <:» II • T ... '" Ir. ~~~rr~ v TT~ A ~ 1.rl..500 1983 - rIiI\ D.. n ~. ~..

2. B? may B? .2 .. _" V 5 ~ ~?~ " .10 1.I The Wave Analyst Case Studies VII ..90 1 • ~ A I 1"" @ IU f\.00:: •7 'J .

.. 3 ~ CD~ I . [4 1. ~ tf {f \.. a 13 April (Close) .J~~ V b '" b .N a W ~d __.81 - I.~ fL I 1. ~ . c~ B? I __u C? 'J I --"- ..78 - [V a 5 1..l.r-: <. I~ .'0 (5) .fn\ a 1." ~ ~ ~ 1 <..~ I "1 a If .tl: . 4 Il II .82 - ~~ US$IDEM Hourly May 87 ___j I I I ~ 111 1.. <.80 - IU J ~ ~[ ~I\r~_~ 1..)1 2 C J . 1<1 17 An." I • '>. ..77 - <. .n _. ~ I~r~ \ U ~b ~f10 ~ L1J" ~(4) I _f\ A 3 5 _j"'1f.79 - U1 L -s " -...~ I An.. .· ® .15 '-' ._.

8005 May 11 to 1.3 . about it.and inter-day trading will probably provide the best returns.7760 Friday. The price travel from 1. Case Studies VII .1.618 and then subtracted from the 1.7830. A small triangle in the 1O-min graphics provides a target of 1.7670 lows rules out an immediate drop to 1. Wednesday 0745 GMT short-term profits. We will have to look elsewhere for new directions. but it was not enough.7650 to complete a 5-wave sequence.7650-60. as the hourly OEM chart will show only a 3-wave sequence from 1.7650.7660-1 . In the limited downside potential (and horrendous whipsaws) the stomach-churning gameof intra. The rally since then from the 1.77100n May 18 multiplied by 0. Thats one.7830 high Tuesday will yield the area of Thursday 0742 GMT ficiently close to the target of 1. but I have nothing to replace it with althe moment.

4 .78-1.83 and a test of 1. In the latter. The vertical nature of the price movement since asian opening today IScharacteristic of exstensions. Break 1. the analyst sticks to one theme and then proceeds to bolster his case in every imaginable way.87 can't be far behind. the analysts is not predisposed to favor any particular movement in a CUll €HlCY. which I had practically given up early last week. but short-termers should be gearing up to take some profits during the trading day. The 1O-minute graphics support this contention. followed by some nervous selling to test the nerves of the bulls at the 1. last wave of this minor sequence should make a new high over the next 24 hours.87 before taking action. if not all.84. the limits where these scenarios remain valid. we look for very short-term trading opportunities in the meantime. so its safe to say that 1 8280 wOllld probably provide bllt the slightest resistance to this awesome dollar advance.8375-1. And then compounding that error by ignoring anything that contradlC1S n: Adopti ng a concept is the opposite of having an open mind. With Friday's action being of no help.80 half of 1988. Inthe former.83wililikelyprovokea testofthe 1. vvlliel i Cdll be up.7850 from the i now i turns into an ace. look for levels to reinstate long bucks. For a long stretch of time sometimes. And then its every man for himself. We won't recommend going short unless wave patterns indicate a sizable retrace or that the entire upmove is over. down. 01 sideways. calls for a rally t01. The most common error is to adopt a concept. so slight corrections like those in the ~ Wave Analyst Case Studies VII . shortterm profits at the 1. This blindness becomes even more pronounced if a Wednesday 0740 GMT The Dollar rally is very healthy. and specify whether an opinion is a product of analysis or plain 01'guess. and that the process of sifting for pertinent data is an exercise to supportthat contention. and performing as per expectations if I may add. after which we will reap raise the medium term.83. This view. The slight pause in Asia today is partel a miAsr eSAsslidatklA pi scess priOI to all assault of 1.82-1.83 range and stand aside. The next trading target is now 1. adopting a concept implies that a conclusion has already been arrived at long before the evidence warrants it.We are at the edge. So once again.82-1. So keep those long bucks for a While but take some. The Dollar is doing just fine. with slight improvement to make the waiting worthwhile.83. We will likely get a break of 1. If we altai n this over the next 2411001 S I 5el iously suggest to reluctant long-term bears [0 starr covering-short positions because it would be such a waste to wait for indication at 1. Obviously. Abreakof 1.82-1. a clear and sharp assessment is often notoriously vague and where uncertainty often leads to fundamental errors.8750 a Friday 0745 GMT rience. The one currently in vogue is that the Dollar can only go down. If you took you profits as suggested wednesday.

It proposes that a large C wave composed offive waves is enrouteto 1. I sowe to draw short-term trading tactics with this wave count in mind.7660-1.8070 bid within the hour.8210 area for an- previous 1. and The retrace was a real killer. and a subsequent decline during the end of the week or early next week.84.8210 area.93 OEM. A rally back to 1. be sureto remember that intra-day space and not to overstay your dollar shorts. Even assuming that the 3rd wave is over.83 took exactly 50 percent. with a less likely target of 1. or all of the above. It did point out though that my short-term wave count was assessed by Elliott principles. Tuesday 0750 GMT i 3rd waves are most difficult to pinpoint.8075 objective has been satisfied. with an objective of 1.8075. and that change play the same tune.8150 being reached today. So unless this retrace pattern develops into a real killer like a double zigzag or triple three slammer. because if this current slide . it will take more than a couple of days or couple of weeks for the power to be dissipated. So aside from this very short-term dollar sales. But the scenario ing to rule of alternation gets steady support at the 1. The retracement from 1. a slammer.Monday 0820 GMT of prefered scenario. no other contingent moves are warranted until and unless we reach 1. but if you do so.82-1. though the Dollar may tick down again to 1.8150 is not an unreasonable assumption since Our 1. and I am not quite sure if the minor 3rd wave is over. the current decline/consolidation is but a 4th wave.85.82-1. Put stoploss at below 1.77 lows. I money on intra-dayselling. shorts taken yesterday and initiate purchases. are too numerous and too contradictory at this point. I am recommending buying short-term trading bucks at the 1. Butthe drop did nothing to change the medium-term outlook.80. look for 1. which is typical of small degree B waves. Long term investors should do well to start I to this new music. a Volker.

! 111 Alfm i ":J 1') T..82 /~ !' ~ J [I fj' . ~L"~ .i~ ~~ a t1')~ b In r 1 111~1'~I'~""'" ~' If JIt...Hiiilii I "!. J (High-Law-Close) 3 ~1.!lln~ I\' I \ _I 1 I~ J I .JilI V~\ .: . ~II"'~\ ~ V-i"'/'rJ a • 5 C V ~ -~.84 ITcct/rH:'..II".29 June 1 ._I 117 ~f~. I~t}~I If iI q N~r~ .0'11 ' '7~t~~ l~~~. 1. 7'L ~llr\~'~ c R 1. .78 .~ I~~ J rt"I~.11 1 1~~~1 ~ .\.J '~~r~ Ii ? 11 1.~ _. !) rs.C 1. 1.80 II II" 1IIIt -\ Rl n I 11~ ~ 3 Ill~ ~III 1 J • .r ..76 May 18·22 May 25 .tv. 1_ 1." .5 June 8 -12 .1 I ! 1.~~.

Most of the Sterling rise from the lower 1. and we fret and itch with the rest as we wait for traEle ligures to induce SOffle action. I wonder how may cents the Sterling will give away this time. In a major bear market. insofar as the forex market is concerned. and I commiserate with the guys who have to come in at 4 in the morning to watch the sterling rally.6 . The 1. but even that view concedes a prior move to 1. Tile bl itisll electioll is the biggest non-event of the year.78-1. There is no guarantee that this indeed is the 2nd wave bottom. Tile 2Fld zigzag Indy Ilave just teil/dllated at 1. merel that wave forms don't fit rationall into chan es in 2nd wave of a major rally. so its buying time again. pattern being followed by the 2nd wave is a double zigzag.7850 objective was further refined yesterday by a triangle in the hourly chart. which changed.N. I~ow Inattney nave n.69 was fueled by expectation of Mrs. or "retracements" are often complex and are the most difficult aspect of the wave sequence. The worst scenario now defines the risk as a possible 2nd wave bottom at 1. Yes. I still believe its the right time to get Ollt of Sterling There are parallels to the c~rrent situation. or fall. Elliott once observed that corrective phases. Nothing of that sort happened.8030. the link between two juxtaposed simple pattsms.61 was basically in expectation of a conservative victory ill Ine polls. tile 3rd wave in a sequence of five. a double whammyin my vocabulary.77 area in a few days. This sounds irrational only if you are convinced that forex rates are tied to current events. A wave analyst can recognize points where the end may be occurring.ost povv8rrul parl 0) tile rally. For instance. with its dramatic reversal doing the job of an X-wave. Go long bucks. but the only certainty is that when it does end.775. wave principle. And right now the odds favor a major turn-around. no sustained rally. The Wave Analyst Case Studies VII . which is quite typical at this juncture. This isn't saying that Elliotters know what is going to happen next.0750 GMT Th 0800 GMT medium-term dollars at the 1. Technical analysis students will find a full discussion of the alternatives below.60's to 1. The first zigzag is the Volker drop from 1.8405. the double can develop into a triple. culminating in a diagonal triangle or falling wedge which should be obvious to anyone keeping hourly charts. Wednesday 0750 GMT We have attained the 1. at least.7825 as I write this. Blame it on the Bank of England and that itself is omnious. at least forthe short term. we have been waiting for today's dollar 10'" since last "'eek to iss~e a fAajor buy recommendation. which is assessing probabilities. As our regular readers know. 11 Will nave traced out one of the eight patterns which are typical of corrections The most straight forward and I believe the most likely. a target derived by projecting the likely counterpart of the Volker drop after that brief reversal. despite how you feel R. butthe I am afraid the dollar did exactly as what we expected. I am also recommending to medium-termers to start accumulating Dollars in dllticipatioii or tile lI. Thatcher calling for an election As soon as she did the pOl!Od lost 4 cents Then the rally from 1.7850target provided by atriangle thrust. the public psychology during 2nd waves is one of unbriddled enthusiasm.

then the buck should rise to about 1. and should be followed by a fairly persistent slide to 1.84 witllout Illuclldifficulty.84 high by taking profits.8125. I favor going long. if you point a gun at my head and say trade. vvelookal 1. Medium-termers would be better off side-stepping the correction from the expected 1. This should be followed by a recovery to 1. so we should flf)YUsl9ittsl9ol't-tsln i stl ategyflOII)buyil 19fa 5811.84 area before the 2nd wave correction can go. I in late New York or early Asia.8170 to sell. that is. or at worst. It the current consolidation is part of a sizable 2nd wave correction.8240-1. How to cope with the rally on Tuesday 0740 GMT rally as a Bwave in ZigZag.236 of the distance traveled by the move from 1. But a run-up to new highs definitely completes the 1st of the 3rd ~eiling ~~ asizasle sRortlerffl deeliM. orc. "'ill follow with the waning of the selling pressure.llg.8330. Otherwise. probably not more than 50 percent of the run-up from 1. It should end at about 1. and usually finds expression as minor 4th waves or as Inilial stopping pOints of major retracements.7 . this translates into a possible test of 1. then expect another strong upmove to 1. In USD/DEM terms. MiAifflulfi doviliside targel therefore is 1.7825 to 1.8170 area from current levels to complete a minor 4th wave that metamorphosed from zigzag to an irregular.7825. where typically skepticism still runs rampant on the longevity of the bull move. There is no way of predioting ROWlow tReir selling frenz) will depress the buck.8360.l!'e gf t~e 3rO. This Fibonacci ratio of . tho 3rO W. A minor degree five-wave sequence is susceptible to adjust one more slight dip to 1. FlulI) a tladilig pOillt of view ill Europe till Ie tll9Iefore. so we look at the sterling pattern for clues. In the current consolidation is a4th wave a lesser possibility. But its a safe bet that it won't be rnuch.82 area is . 1. Ifavor the first scenario.8350 which completes the five-wave sequence from 1. The next run should see 1.8170.7825 to 1 84 The S' Ibsequent explosion.6210 area.84.This is just the start of a cannonball explosion we mentioned last Thursday. I'::: Wave Analyst Case Studies VII .235 is forex market. A lesslikely possibility is forthe buck to spiral down to 1. Unrepentant bears will probably look at this socalled formidable resistance as one more excuse to sell on. 1. We are not even on the booster-stage 3rd of a 3rd.8240.8330 peak to the 1. as my newest wave count suggests.64-1.8275 before coming down in earnest.848s [lleelidot [tie lSI wave of the 3rd of C.65Iastlng 2 or 3 days. I'll wait for new tops or break of 1. not give a clear intra-day picture at this point. 81101 tDollars run the tolerable risk of a final surge to 1.

. I believe we are looking at the start of the fabled 3rd of the stab to a new peak. No ifs. once and for all.83 area.8375 before leveling. a move which should bring the buck to at least 1. say. and despite my references of it providing buying opportunity at 1.8350-1.84. The situation is this. after which the buck goes into consolidation mode once more. Tracking this 2nd wave of the I we need is to see five waves from the 1. this view has the same implications as a 2nd wave retracement. 1.8530 1.90. But then. the most we can expect on the upside is a tickup just below 1. If the buck goes through 1. and I am tempted to maintain that it is a B wave in an irregular correction.8530. a tick-up to 1.84. and the3rdofthe 3rdis on the zigzag.Tuesday 0730 GMT Wednesday 0700 GMT Friday 0700 GMT was I a correction to just below 50 percent of the entire rally. The down move is not quite over.85 was much too great to miss. So the dollar is set for another rally which should clarify the short-term direction. it will as arguments pointto one thing. forgetthe prognosis of the doom-and-gloomers because the rocket's next stop is 1. Short-term and medium-term palpable.85 peak to conclude that the 2nd wave retracement is over. no buts.

the rally will almost certainly continue. then expect a drop further to 1. I would get worried if the buck at this stage of wave development. If you don't I I I I during Europe trading.82-1. the dollar has just confirmed the resumption of the rally by breaking above 1. For medium-termers. Full technical discus- process. thedipto 1. the zigzag concept prevails and entails a prior test of 1. The breakthrough is not as dramatic as it would normally be. Europe as a consequence of finishing a five wave sequence at 1.Monday 0700 GMT 0730 GMT Thats it. it has better than 70 percent chance of pushing above 1. Make no mistake about it -this rally is no flash in the pan.8260 by New York opening. But if the Dollar has fallen below 1.8190.8190 i I consolidation.8340.which was eventually followed by the phenomenal bull rally that had no equal in history. is actually a very bullish phenomenon. The short- fibonacci relationships within the price activity from the 1. although we have to bear with the market for some time while it makes up its mind.8190. If the buck goes through 1. because a very minor five-wave se- scenario of a much higher Dollar. which some wave analysts are pointing at as evidence of weakness.84. .8275 today.80 target unlikely.80.8150 recent low makes the 1.

J lij I.'l . 1. .1.I.r ~ !l'1 1..".'I fir lJI1T 1f .. n'"~r ~j / ..[I' 1 'T i" '~ 4 IM\JI t 11 3 V1~~ ~ i .• " . 1 A 5 1[.85 h 1 3 II~A.-. ~ 4 1~\1 III~ V I~ • ~i~~~ ~l~ . I~I ~\ n JIJ~iW ~l dt .1 1. "" ._.84 US$/DEM 11) Tmw _ Hourly u.83 I ~~ rl 1V1 r~II~~L.u \~I' III.'" .!! ~tJ I IJI I" 2 II~ I"no'<:: .. T"I" 1<7 (HiQh-Low-Closel I~.. "" . IT a y n ..~m r1.~ on .

medium-termers should stay long bucks.8510.10 . Tactics for the next 48 hours. Maximum target is undefinable because if the buck goes on an extension mode at this point.84 area later in the day.8550 immediately. The market is drawing closer to a point where an upside break will -if it is one.The dollar claws its way up inch by inch.85 or thereabouts. If it does. but its I Needles to say.8490.8550 and Case Studies VII .8510.5870 level. and the first indication is a break through 1.6060-1. and possibly even make a marginally higher top at 1.8450 area in Europe today. The Ii I I and the first might be ending at the 1.67 consolidation.overlaps with the 1. The only thing that is keeping me from discarding the possibility is the peculiar pattern of the Sterling from the 1.63. The alternate scenario of a wedge-like C wave calls for more whipsaw consolidation between 1. the mean one couldn't make money out of it but it is risky in the light of our basic premise that there will be a decisive upside break of 1.8530. which is a definite negative. please and optimum of 1. We are looking at a phenomenon where waves of small degrees are showing full resolution. but we prefer it that way. The only way it can maintain its integrity as structural problems. Short term traders who have gone short will probably find opportunities to cover at the 1. which is quite similar to the small triangle with apex at 1. keep long bucks until 1. Wednesday 0700 GMT Friday 0700 GMT should at least equal the recent peak at 1. and reverse with a downside target I I I onapi area. Take profit.


The Wave Analyst Case Studies VII .11 .

lIIU' UI:"'<U"U l'.mnp~ro tn ho r~n. When scientists speak of chaos.. UVHI" Ll1111.' LW 1 v"wy n"n_l.. But to accept the future. which they have proudly taught to others.... ~v "u "'"'N •. T -0 "I.. The field has made recent headways.'. mctuding those at easeunth problems of the greatest complexity.!'\ The Wave Analyst vV""'U'>'V - .nc horr. stable and the factual representation of reality.on~o ctnn' ". The neat solutions of classical science's "deterministic probability" championed by Laplace and along Iine of science personae..<. '0 I . inear systems were the aberrations.-!.. . ~o nnom 1\ ..r . and electronic circuits have found that these systems can produce streams of data that will rise and fall as erratically as the stock and forex markets.lL· .~ Conelualon ymw. Recent findings indicate that even in the most seemingly chaotic _.f fh" fn/c.. .m. 'H~ " v'u~ .' rr tion is clear: It is now a time for a paradigm shift. irv n. . 'J'I. . a biologist •• ~ <' -r 1 OQ(\ . thread by thread. and which they have woven. ~~ e- 'J.oro ~h'. but with the "globalization" of monetary flows. .pn' .. indicating that they may be governed by the rule of "chaos"..1\1. the discontinuous and erratic side .VVI:ll rvtayx. 0). 'A hI.n"~r One of the most exciting developments in science in recent years has been the discovery of innovati ve techniques for unravell ing the structure of "disorder". and from the beating of the human heart to the clustering of cars in the highways.. ~6' . <UHU. wildlife projections. Scientists studying chemical reactions.." J J random systems... oL.1: jJ"'" .n "h . Chaos now presages the future as none will gainsay. V< -0 "1know that most men.' R. a transformation in our way of thinking of and looking at the world. . h~~)~ delighted in explaining to colleagues..chaos . they mean erratic behavior 'h~· . This is the irregular side of nature.C J< ~ to cnaos IS a searcn ror uncertymg 'V"~'''' """" Y ..-II· on' ...). . "u.0 n...-l". .. mar oruy a lew "ill remember mat oroer i'no conventional approaches to random-seeming phenomena . h.which has always baffled science. n vun VI: >a<u Ll""~<""'v'" c~. "The heart of chaos in mathematically accessible..f' n/ 7I1hirh fh". It is a fast growing interdisciplinary exploration of complex systems ranging from the weather to economics... Recent advances in understanding chaos promise to modify that long'.pc "r" r-h olle..uo I ne essence or trns new approacn . one must 'I:UVUll"I: IIIUv" VI . has so long dominated the way We IUUK at BaLUn... can seldom accept even the sim+1-. Only a few still understand that the core of nature is _". . '-J _ .' • • This new understanding of the "law of disorder" has been dubbed the "theory of chaos" or "non-linear dynamics".~ ..u~' . into the fabric of their lives. One of the first areas of endeavor that will benefit from this new science is economic forecasting.0. A .h. Chaos has posed problems '11"'11" VI: '''I:U '''J' v. -0 . the parameters are starting to • ~1. Chaos has been found to be ubiquitous.]. the behavior obeys the same newly discovered laws.

Starting ..u. .v' .* . . errors and uncertainties multiply. economic forecasting has begun to re- semble the manner .: from the 1970's."".u".. u.. .1th ·f" ·h.' ' .." A 'J' ~IIC UC" IC"CIIl CJI. ne misses nis plane. one so small that modellers usually forget that it is there: measurements can never be perfect or exact.r '''''' o 'v -". But there is always a compromise. magnify -. as well as economics rorecastmg. "U. But there's a catch to it. .. . lIlC counter-intuitive ologists "UUUI uie 'U-C"IICU DUUCIUY DUC'" ... VUL mVlLlaLY . working their way upwards through a chain of amplifications and replications rendering the result practically meaningless.a phenomenon given the name "sensitive dependence on initial conditions" (SDIC). 'J economic modelling can be so maddeningly frustrating.n A"r -Icil o l. Tiny differences in input could quickly become overwhelming differences in output . . ~~n h~"" hr<Tp 0 proved that wrong. . economic modellers were similarly confronted with vastly increased number of "conditions" ULa'"'" Val" . it is also true that chain of events can.. C"~P' .. wtrrch evenruauy There are less dramatic examples.·· -. In weather forecasting. ''''''1'''''. This sensitive dependence may have been the cause of the crash in the first place. Inevitably. .!'t~ r- -r- TI-."III~IC" 'CI1C' UI MIl"1l l'UI"lI"'C' III ~: ~"U'CUIC ""::' -e ' -J a material effect on the weather in California next month. " . !" " "'JUU"'Vuo . -r-r.1. predict the weather. Afterthis day. discovered the Butterfly Effect in 1961 after making a slight error in typing out the initial set of conditions in a computer simulation of the world's weather.Makin" a New Science". Recent discoveries in chaos theory have '". Care IS taken '<0" "'''" . to their face value.. vu . which set off the next. tr~. Someone gets stuck in the traffic on me way to me airpon. 1. ... but the picture remains the crashes...n "C"ctp~ -0 -J ". approximate the mechanics of weather or the economy by turning out measurements of "initial conditions" into projections of future trends.·. -e •• . -0 findings in the studv of chaos . In weather. In economics. * "CHAOS .I<. The initial drop caused a computer program to issue a sell order. " v. Lorenz concluded that long-range weather t"rp~"ctin .ro'" 1'L"""" c.~.. After the globalization of monetary flows. many set or equalions uescri Ding a dynamical system..n' -O'r . " mathematical laws. "u". .1.1< small quantitative adjustments.p~tM" J conseauences. crisis points.. which triggered another. crrrcll v-l. There are unavoidable simplifications during the process. Tames Cleick.. London too for anv long-term economic 1" J h TC \ 'U' r-. Recent ~h. certam assumptions are taken attne startmg point.p ~h mm>c . """"L1" 'v . Edward Lorenz. Otherwise. it is assumeu that in accordance with linear cause-and-effect. a weather forecaster who lives in Southern California. 1I1~ ' '.. "1HU u'.""..~~ll r- . one can always calculate the approximate behavior of the system. brought out the fallacies of these linear suppositions into the open. J' . 1988.5"""~"r cu.5 "='1'. Penguin Group. large changes in parameters ~"n ~"noP 1· -0 The Lorenzian effect of "sensitive dependence on initial conditions" cuts a wide swath across our everyday life. . by which meteorologists . as in life.....1.n.mrrpc ~""CP An1 -. meteor.f. "LVV"" Sets or The Butterfly Effect is the culprit. u'"~'~'''''~''' . "n 'J' 'un ... ' . . the model is finetuned until the desirable quantities are winnowed out of the system. "'iumLv".uo'. 'J . 'U'Yv' 1/111 o . at small changes out of proportion . . modellers hope that this distortions are kept to a minimum.rpcpntfA~ . October 1987. "'" uun. It has been largely credited for halting the wide-spread panic: it may have saved the world markets from a more calamitous fate..

'.Most people assume that crisis points like this one are few and far in between in dynamic processes.will . Chance. interest rates.c.•• wef in economic forecasting. .vu uy lalt. arc naturauy .''' book "Fractals: Form. " . T~rl t" h. One camp argues that phenomena must be regulated by some deterministic mechanism. it also produces detail with certain constant measurements and diffractions within certain patterns. One example known as 'tractals JllivU 'J ~v" <Ill: rcu rn. n '''''":>.<tinO'n7~~:hl~ frnm "noi<p" This curve renresents the standard normo 1 disrrihution of random nrocesses .H . " . 'v . once every hour. the turmoil had no bearing to the grand trends ofbudgct deficits. ' .!"" 1". certain patterns are present inside patterns. If transformation IS part of the process.h.lIioll aiso nypumesizeo .•he cancelled out bv random fluctuations. CI.. an economics professor at Harvard. lincarcause-and-effect accounts for most of the behavior. The Wave Analyst . . or (2) random external noise produce random behavior. nnrl C.l:ll"'" c dependence on initial conditions" was an inescapable consequence of the way small patterns intertwine with. Whatever deterministic "tendency" . c: .~ 'l' r!. once a year. c. HC.. T••• rutures contrac s auu ll~eir ~lluenyillg el[UilY Ud"'t'" I" '''''" lll:-' ""5 . .. indeed even determine. '0 'J .h The choice was either: linear dynamics.. James Gleick relates in his book how Houthakker had F. The concept . m hpl]_<h~"p. of the dynamics of the economies of the are the basis of Elliott ..v115 ' '" " broke down in the face of rapid swings.. and Dimension" published in 1978.. His discovery that patterns made by taking very short -term "snapshots" of stock prices in.. ~'" inrl. Recursive process operates across various dimensions in fractals.1' unc • VI l' '0 l' :n. . In other words.n . or forthat matter. It has been shown that what looked like random behavior can be produced by simple deterministic models. Fractals T . sensitive dependence on uuuat conmnons sole determinant of the fortune-or misfortune -of millions of shareholders.~~ec F. '0' follow certain patterns.... . II/II . At the height of the October 1987 panic.-1 r. As stock prices began to plummet. mar me vai iation ill . Tn .vl) Ulll""U'''' One of the most suggestive latest advances in (1) deterministic mathematics produced steady behavior. . In sys ems like me eco omy or tne We"LIIl:L. .r'''"m.if present at all . and perhaps subsequently open the door to real understanding world.. th. or governmental was me policy. The New York Times described water flowing uphill".. . "F l'1""1O"'Y L11" .. At that time. Chaos cuts across the heart of the debate. . transformation is repeated at smaller and smaller scales. the course of the lame ones. are similar to patterns formed by snapshots of once a week.. ~. The wildness offered a vivid . The other group msists that processes Hv ~ .~"l"e in th.. I . prices of details at finer and finer scale."< ~nrl fluid dvnamics hvnotheses oronosed bv Ralnh N.n". it as the "financial equivalent of u. Wave Theory. erratic. .UVVl:'Ul:lH' all: U'''I''lVI'' "au. The recursion does not only produce similar ""'V" "u'vu. or once every month. Elliott in 1930's antedating the formal study of non- that account for the fluctuations in a system are divided into two camps. But chaos study showed that such pomts are everyw ere. collaboration of Mandelbrot with Hendrick Houthakker.wrucn means of that "exquisite structure" is what has become sett-simuar . oeir -simuanry IS symmc~.. chaos studv tend to confirm these behaviors. And what looked like erratic ..' <torlc market of \U~< l nc in "pnpt.t. It is the phenomena that will eventually provide a key to understanding non-linear dynamics.. say.. example of how large-scale behavior are shaped from the microscopic details of trading. findings so far was brought about by the . ''''''. He was almost certainly correct.

the motion will eventually settle or foreign exchange data. cou d govern random stochastic phenomena. he also related his inability to fit the data to the bell-shaped curve. chaos researchers found that huge oscillations are against the trend. But Mandelbrot was invited to Harvard by Houthakker to give a talk The next frontier in economic forecasting patterns which govern the amplitude offluctuations will be deciphering the in market data. But in actuality. Houthakker explained that those were cotton prices. Take a simple pendulum. intuition tells us that no matter where the swing might start. Broad swings of prices over months or years are if the system receives a sudden jolt . In its simple oscillations. That dichotomy had no place in the findings of Mandelbrot. . It confirmed his Idea that other laws. But that does not mean that they do not have a fundamental viewpoint about price changes.a perturbation of a kind that might To economists. long-term changes. with di ferent behavior. predictability. a large part of the research in chaos is now devoted to this field. One was the belief that small transient changes had nothing in common with large. these are forces that should therefore. they try to stay near an average point and they manage to scatter around the average in a reasonably smooth way. Mandelbrot instantly made a connection between Houthakker's chart with his income distribution data and other silhouettes from surprisingly disparate places. Surpris- man's blackboard.The point is that when things vary. These counter-intuitive results are being encountered more and more by scientists as they peer into the prism of simple chaotic models. Instead Intuition suggests that the system will change in the desired direction. For different matter altogether.

'That knowledge alone is someti. xer constructs twist in the flow of energy in and out of the however. it nas """VII'" T1VljUM" ""11V' of beliefs but also a way of doing science. A~m. 111"UlY.. just because it obliges 1" to admit the falsitv of our current suppositions.y \/11/ t. Yet a trader. . In the end we have nothing to lose but mental excess baggage that should belong to the rubbish bin of history. ivtar- dysis like ure Elliot r ave lU"V1Y..the path traced enroute to a stable state is oaseo on} doubt. seeing a short-term rise in the dollar after the selling effort. Crude it may be at this stage of development.. would assume that the intervention has failed. In the markets subsequent quest for equilibrium a process now known to be far from being straight forward .-l bv man on his imacination and curiosity.. the central banks got the desired results. to paraphrase Tolstoy. there is more than even chance that a non-linear view of reality would supplant the concept of "deterministic probability" that has so tong nommateo me way we think aoout our economic affairs.:es enough in formulating engendered strategies that will effectively As scientists handle uncertainties by such perturbations.o. but only after an uncomfortable time lag that saw the market movement gomg againstthem initiall y. does not nccessaruy mean random. r- hlp hpho. dynamics.p.. such oscillations have been seen in the forex market in recent years. wave analvsis provides a framework upon which to assess the probabilities of possible consequent market action after such perturbations.1oYph. In this example. .t. Which brings us back to Leo "rA1. Unpredictable. -e» • pyrpntthA<p. chaos has learn more about non-Imear oecome not just a tr eory ou a so ameU10U. Let it not be said. reminiscent of the oscillations predicted by the logistic difference equation m ""av. To profit from this new science one must be willing to suspend disbelief until it has been given the benefit of the doubt.Ar h"o nAt hpp· fnll vet hnt it . rrave had these past few years success in anticipating and coping with such puzzling market phenomenon. Let us prepare for this eventuality.ppm: to come mainlv from a non-linear system. The history of science is marked by twists and reversals..1Y1n"./ \ .An "'1" Af'lmmulp.In fact. that we can not accept the simplest and most obvious truth. This -r At this stage.

"U" TT - IV .4 IT ~ '" Triple Three Deviations Substitutions II . TT H Complex Corrective Forms Double Threes ZIgzag Complex rUlL --r II . II .12 III2 TIT. .4 II .S "Tl.'1'1.9 II .8 TT-ll III1 II .Illustrations by Topic .3 II ." II IIITT II-IO II-ll TT 111 - 9 7 12 12 I' A The Wave Analyst tuustrsnons oy IOPIC - 7 .4 Zigzag Corrections Basic 11 6 Double Three Triple Three Deviations Substitutions II TT III IIIIII- 9 12 2 3 4 Triangle Corrections Basic Double Three Triple Three Deviations Substitutions II II IT IJIIII- 6 9 12 2 6 rial TI.I" - Extension.7 1\ - v f Double Three Triple Three Deviations Irregular Correcuons Basic n~"J. '''. D •• II .6 IT " Irregular Complex Substitutions Triple Threes Zigzag Complex Flat Complex Irregular Complex n_ . Impulse Waves Diagonal Triangle Special Type Expanding Type 0""1.

1elel '''VU1.7 Fourth Waves II -2.8 Triple Threes II .2.4. IV-11 Supercycles II . f'v' .'. JJ . IV .8 Wedge refer Diagonal Triangles Zigzags Iv .r u aec H.6 Triangles IV .3 FaIlure II . I\i .11.10 Double W 10.10 Fibonacci Ratios li .10.8 Fjfth Wave measurement method IV . IV .1.. II . IV .3.9 Principle of Parsimony IV . IV .5.1 hnpulse Waves II . Jules Henri V .:.Index Blow off IV .1.6 Correction Waves II .6 Fractals VIII . Iv .!: 'UYt:. III . II .6. ~lI 10 .I Principle of Alternation IV .2 Trend line IV . VI .3.2 Extensions II .6.4.I.12.13. IV . refer Corective Waves Third Waves IV . VI . V-I Channels IV .5 Cycles II .2 Il. Iv .I.3 N umbered Phase II . Non-linear dynamics VIII . II . rerer I mputse Wave Occarns Razor refer Principle of Parsimony Poinccare. Horizontal fll.12 Flats IV . IV .5. Iv .-"lUlll"l .2 Irregular Flats IF 7 Lettered Phase 11.6 Fifth Waves IV .2 .3. Wave Analyst Index -1 .

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