Elliott waves - a tool to predict the most rapid ups and downs
On January 22, 2020, the rising cycle on the S&P ended and the declining cycle began.
Apart from this one tool, there was no indication that we were about to experience historic declines and the biggest panic in the markets so far.
On March 6, 2020, the correction ended and the oil market entered a downward cycle.
Only one group of traders was not surprised by this, they were prepared for it and made money on the huge declines. The others were able to read about the reasons for the declines in the newspapers - but only after the fact.
This is not a coincidence
There is one group of traders who systematically discover market turning points, regardless of the news hype and expert opinions. While others panic, these ones are prepared...
That tool is Elliott Waves.
A large number of institutional traders use Elliott Waves, either as a main or companion tool.
One way to do this is to analyze closed structures. If an upward structure closes then we know that we have declines ahead. In January, it was clear that we were facing declines at a minimum to the 2500 levels on the S&P (that is, by about ¼, we just didn't know how fast they would happen). But within a few days the real drama began and the market fell even lower.
Elliott waves work on currencies, commodities, stocks and indices (there is some specificity here, due to the composite nature of indices). Waves also help predict the movements of cryptocurrencies.
A personal note about Elliott waves
I have been watching waves for about 10 years, accounting for more than 6. Like many people, I consider it the most advanced tool of Technical Analysis. It is more than 90 years old, and is used by many traders from large banks and mutual funds.
An in-depth understanding of wave action will come, I believe, in a few years with the development of Artificial Intelligence. Then we will be able to understand the interaction of factors that affect the price. Our current model is only in the preliminary stages of construction.
The biggest benefits of using Elliott Waves
No matter what system you use Elliott analysis will show you the possible course of the market situation. Sometimes it is well predictable. You will avoid many unpleasant surprises that will surprise other traders.
Many traders use Elliott analysis to forecast possible movements, and use their systems to enter when the expected movement has already materialized. In other words, they trade after confirmation.
Combining Wave Analysis with other Technical Analysis tools increases the likelihood of good entries.
Focusing on:
1. trading in the direction of the trend indicated by the waves,
2. and on the strongest movements
allows you to improve your results.
Elliott Analysis helps to indicate which entries are better or best in a given market situation. It allows you to approximate the ranges of movements - both impulses and corrections. It is a good way to look independently at the TP (take profit of a movement).
Wave analysis helps identify situations preceding strong directional movements.
In such a situation, if you use another system you may have several, a dozen or dozens of good signals in one direction. Such situations are rare, but... they allow you to systematically build capital with low-risk entries. I will describe these situations in a moment: how to recognize them, how to prepare, how to enter them.
Elliott analysis helps determine whether the market is in an impulse or in a correction, and often helps determine when, or at what level, the correction will end and we can have another strong impulse.
Elliott analysis often provides early signals of the end of trends and the ends of corrections.
Why do Elliott waves work?
In part, it is a selffulfilling prophecy.
Since the 1970s, waves have been widely used in large companies at least, as a context to describe market behavior. There are also funds, or divisions of investment banks using waves as a primary tool.
Knowing exactly why they work is a matter of research. We will have the right answer in a few years. It will include the impact of seasonal cycles on demand and supply, the impact of other types of cycles, statistical analyses of market behavior and anomalies, analyses of social moods, analyses of the impact of production processes and supply chains, the context of political events (in the case of commodities, gold and currencies).
Elliott waves may be the missing piece of the puzzle to build, test and refine the highest form of Artificial Intelligence in trading - General AI.
What tools do the greatest traders use, or how it all started?
I have often wondered what tools are used by the greatest, those who move the markets. This is how my adventure with waves began. One day I picked up George Soros' book "The Alchemy of Finance".
The foreword was written by prominent billionaire trader Paul Tudor Jones. In the second paragraph, he mentioned Elliott waves as a tool that captures the economic, social and political context into one.
At this point I stopped reading further, my interest turned to waves, I thought it was worth learning more.
Today (2020) the situation has changed somewhat. For a dozen years or so, there has been an increase in the use of mathematical strategies (quant strategies) based on the study of statistical relationships. It has reached the point that today already most orders are executed by algorithms (more than 50% of the volume).
Algorithms are based on a few market observations (underpinned by strong mathematics) and virtually every major strategy supports... the natural behavior of the markets. That is, markets act the same as they used to only... more. Certain classes of movements are stronger because a lot of algorithms go into them.
This means that Elliott waves (in general) work the same way, only some movements are amplified.
What tools are the biggest traders using, that is, what will the future look like?
Algorithms analyze many types of data and, based on this, type the size and location of entries. Among the data we have fundamental data, alternative data (very fashionable for about 3 years), statistical data, technical data (in the sense - using technical analysis, but for now quite simple). This will be the future - currently built algorithms will use dozens of sources, analyze signals, manage risk.
I believe that Elliott waves are one of the most advanced tools of technical analysis, and sooner or later they will be included, as one of the decision-making factors. Perhaps one of the main ones, just as the big "manual" traders do today. And this means one thing - waves will work even better.
If one has experience with waves then one knows that one can try to account for all impulses and corrections, but from a trading point of view it makes no sense - there is no money there, the movements are uncertain and short. It is best to focus on the best situations, the least risky, and build entry strategies based on them - manual and algorithmic.
The best will certainly be the well-known: wave 3, wave C, setup for wave 3 in wave C, trade for a reversal after a wedge in wave 5. There are also several less well-known.
What's the fastest way to learn the waves? There is not much choice.
The topic came up again in a conversation with a bank trader a few months ago. His new job uses waves, while he had his first contact with them. His problem was that he wanted to learn them as soon as possible - at least enough to understand the analysis he gets from the Analysis Department.
He asked about books, about training, and for the first time I began to wonder what to suggest to someone who wants to learn waves quickly?
The problem with current books is that there are too many words in them and not enough examples. In particular, not enough examples of waves and situations that traders most often trade on.
Learning Elliott waves requires having a very large number of good examples. This is the fastest way - reviewing how the price drew impulses and corrections in the past. After a while, you learn to intuitively recognize possible settlements and set-ups to trade.
This also applies if you want to use external analysis, you need to have your own independent view.
Many details come out only when analyzing a specific chart.
In a few years, with the maturation of AI, having alternative data and mathematical statistics, we will be able to determine which settlement - basic or alternative - is more likely. What are both types of settlements - will also show with examples.
This is a key thing when building larger positions.
One of the best books for waves
The best book I know for waves is the position written by trader and head of the Technical Analysis Department of Union Bank of Switzerland (today's UBS) Robert Balan - head of global technical research (London AND New York).
The book "Elliott Wave Principle" was recognized by the London Society of Technical Analysts as "the best book ever written on the subject".
Indeed, it is the best. Few words, lots of diagrams and explanations. Due to the time (it was written in 1988) and publishing limitations - it is also not able to quickly convey the essence and show it with a large number of examples.
In the meantime, several "shortcuts" used by wave traders have also been created, and I think they are also worth showing. The idea is to systematically repeat market patterns that are fairly easy to identify. I will show a few of them, because they help to better understand the operation of waves and for beginners can be a great help.
A few sentences about waves in the context of the upcoming Artificial Intelligence revolution in trading
Waves can complete the picture of market behavior when we use machine learning techniques. I think this will allow us to create an early warning system - when the characteristics of the market can change dramatically in a few minutes, when the algorithm holds a position or builds it.
The market can go from weak, corrective behavior with low volatility to huge volatility, or when a strong and violent movement suddenly changes direction. These are typical problems known, predicted and solved by Elliott waves.
Typical wave behavior (sudden changes in volatility /volatility/ and direction) is critical to the selection of samples on which we build the model. And here an important note - in addition to other characteristics of sample selection, we must have a way to estimate these two factors, otherwise any model we create will produce systematic losses. Every single one, 100% of the time.
Good use of FE can improve both the profitability of the models and speed up the calculations, because we will take into account the (dramatic) variability in the nature of the data (strong variance change). By good use here I mean understanding, finding the regularity that governs consecutive cycles of low and high variance. This is a rough mathematical description of the situations that Elliott waves describe.
A short note for beginners and intermediate learners
You do not need to be able to account for all waves and every situation, because in retail trading it is not necessary. Stick to the best situations. The simplest ones.
Waves in a nutshell:
If you liked this post, give it a boost 🚀 and drop a comment so we know to publish more for you. Cheers!
Apart from this one tool, there was no indication that we were about to experience historic declines and the biggest panic in the markets so far.
On March 6, 2020, the correction ended and the oil market entered a downward cycle.
Only one group of traders was not surprised by this, they were prepared for it and made money on the huge declines. The others were able to read about the reasons for the declines in the newspapers - but only after the fact.
This is not a coincidence
There is one group of traders who systematically discover market turning points, regardless of the news hype and expert opinions. While others panic, these ones are prepared...
That tool is Elliott Waves.
A large number of institutional traders use Elliott Waves, either as a main or companion tool.
One way to do this is to analyze closed structures. If an upward structure closes then we know that we have declines ahead. In January, it was clear that we were facing declines at a minimum to the 2500 levels on the S&P (that is, by about ¼, we just didn't know how fast they would happen). But within a few days the real drama began and the market fell even lower.
Elliott waves work on currencies, commodities, stocks and indices (there is some specificity here, due to the composite nature of indices). Waves also help predict the movements of cryptocurrencies.
A personal note about Elliott waves
I have been watching waves for about 10 years, accounting for more than 6. Like many people, I consider it the most advanced tool of Technical Analysis. It is more than 90 years old, and is used by many traders from large banks and mutual funds.
An in-depth understanding of wave action will come, I believe, in a few years with the development of Artificial Intelligence. Then we will be able to understand the interaction of factors that affect the price. Our current model is only in the preliminary stages of construction.
The biggest benefits of using Elliott Waves
No matter what system you use Elliott analysis will show you the possible course of the market situation. Sometimes it is well predictable. You will avoid many unpleasant surprises that will surprise other traders.
Many traders use Elliott analysis to forecast possible movements, and use their systems to enter when the expected movement has already materialized. In other words, they trade after confirmation.
Combining Wave Analysis with other Technical Analysis tools increases the likelihood of good entries.
Focusing on:
1. trading in the direction of the trend indicated by the waves,
2. and on the strongest movements
allows you to improve your results.
Elliott Analysis helps to indicate which entries are better or best in a given market situation. It allows you to approximate the ranges of movements - both impulses and corrections. It is a good way to look independently at the TP (take profit of a movement).
Wave analysis helps identify situations preceding strong directional movements.
In such a situation, if you use another system you may have several, a dozen or dozens of good signals in one direction. Such situations are rare, but... they allow you to systematically build capital with low-risk entries. I will describe these situations in a moment: how to recognize them, how to prepare, how to enter them.
Elliott analysis helps determine whether the market is in an impulse or in a correction, and often helps determine when, or at what level, the correction will end and we can have another strong impulse.
Elliott analysis often provides early signals of the end of trends and the ends of corrections.
Why do Elliott waves work?
In part, it is a selffulfilling prophecy.
Since the 1970s, waves have been widely used in large companies at least, as a context to describe market behavior. There are also funds, or divisions of investment banks using waves as a primary tool.
Knowing exactly why they work is a matter of research. We will have the right answer in a few years. It will include the impact of seasonal cycles on demand and supply, the impact of other types of cycles, statistical analyses of market behavior and anomalies, analyses of social moods, analyses of the impact of production processes and supply chains, the context of political events (in the case of commodities, gold and currencies).
Elliott waves may be the missing piece of the puzzle to build, test and refine the highest form of Artificial Intelligence in trading - General AI.
What tools do the greatest traders use, or how it all started?
I have often wondered what tools are used by the greatest, those who move the markets. This is how my adventure with waves began. One day I picked up George Soros' book "The Alchemy of Finance".
The foreword was written by prominent billionaire trader Paul Tudor Jones. In the second paragraph, he mentioned Elliott waves as a tool that captures the economic, social and political context into one.
At this point I stopped reading further, my interest turned to waves, I thought it was worth learning more.
Today (2020) the situation has changed somewhat. For a dozen years or so, there has been an increase in the use of mathematical strategies (quant strategies) based on the study of statistical relationships. It has reached the point that today already most orders are executed by algorithms (more than 50% of the volume).
Algorithms are based on a few market observations (underpinned by strong mathematics) and virtually every major strategy supports... the natural behavior of the markets. That is, markets act the same as they used to only... more. Certain classes of movements are stronger because a lot of algorithms go into them.
This means that Elliott waves (in general) work the same way, only some movements are amplified.
What tools are the biggest traders using, that is, what will the future look like?
Algorithms analyze many types of data and, based on this, type the size and location of entries. Among the data we have fundamental data, alternative data (very fashionable for about 3 years), statistical data, technical data (in the sense - using technical analysis, but for now quite simple). This will be the future - currently built algorithms will use dozens of sources, analyze signals, manage risk.
I believe that Elliott waves are one of the most advanced tools of technical analysis, and sooner or later they will be included, as one of the decision-making factors. Perhaps one of the main ones, just as the big "manual" traders do today. And this means one thing - waves will work even better.
If one has experience with waves then one knows that one can try to account for all impulses and corrections, but from a trading point of view it makes no sense - there is no money there, the movements are uncertain and short. It is best to focus on the best situations, the least risky, and build entry strategies based on them - manual and algorithmic.
The best will certainly be the well-known: wave 3, wave C, setup for wave 3 in wave C, trade for a reversal after a wedge in wave 5. There are also several less well-known.
What's the fastest way to learn the waves? There is not much choice.
The topic came up again in a conversation with a bank trader a few months ago. His new job uses waves, while he had his first contact with them. His problem was that he wanted to learn them as soon as possible - at least enough to understand the analysis he gets from the Analysis Department.
He asked about books, about training, and for the first time I began to wonder what to suggest to someone who wants to learn waves quickly?
The problem with current books is that there are too many words in them and not enough examples. In particular, not enough examples of waves and situations that traders most often trade on.
Learning Elliott waves requires having a very large number of good examples. This is the fastest way - reviewing how the price drew impulses and corrections in the past. After a while, you learn to intuitively recognize possible settlements and set-ups to trade.
This also applies if you want to use external analysis, you need to have your own independent view.
Many details come out only when analyzing a specific chart.
In a few years, with the maturation of AI, having alternative data and mathematical statistics, we will be able to determine which settlement - basic or alternative - is more likely. What are both types of settlements - will also show with examples.
This is a key thing when building larger positions.
One of the best books for waves
The best book I know for waves is the position written by trader and head of the Technical Analysis Department of Union Bank of Switzerland (today's UBS) Robert Balan - head of global technical research (London AND New York).
The book "Elliott Wave Principle" was recognized by the London Society of Technical Analysts as "the best book ever written on the subject".
Indeed, it is the best. Few words, lots of diagrams and explanations. Due to the time (it was written in 1988) and publishing limitations - it is also not able to quickly convey the essence and show it with a large number of examples.
In the meantime, several "shortcuts" used by wave traders have also been created, and I think they are also worth showing. The idea is to systematically repeat market patterns that are fairly easy to identify. I will show a few of them, because they help to better understand the operation of waves and for beginners can be a great help.
A few sentences about waves in the context of the upcoming Artificial Intelligence revolution in trading
Waves can complete the picture of market behavior when we use machine learning techniques. I think this will allow us to create an early warning system - when the characteristics of the market can change dramatically in a few minutes, when the algorithm holds a position or builds it.
The market can go from weak, corrective behavior with low volatility to huge volatility, or when a strong and violent movement suddenly changes direction. These are typical problems known, predicted and solved by Elliott waves.
Typical wave behavior (sudden changes in volatility /volatility/ and direction) is critical to the selection of samples on which we build the model. And here an important note - in addition to other characteristics of sample selection, we must have a way to estimate these two factors, otherwise any model we create will produce systematic losses. Every single one, 100% of the time.
Good use of FE can improve both the profitability of the models and speed up the calculations, because we will take into account the (dramatic) variability in the nature of the data (strong variance change). By good use here I mean understanding, finding the regularity that governs consecutive cycles of low and high variance. This is a rough mathematical description of the situations that Elliott waves describe.
A short note for beginners and intermediate learners
You do not need to be able to account for all waves and every situation, because in retail trading it is not necessary. Stick to the best situations. The simplest ones.
Waves in a nutshell:
- Elliott waves are used, as a tool to show the context of movement by professional traders.
- Major algorithmic strategies (quantitative strategies) amplify the action of Elliott waves in the market, based on several typical strategies replicated statistically.
- Over the next few years, there will be a struggle to create better forecasting tools to get into movements faster and build larger positions ahead of other participants.
- Nowadays, Elliott waves can serve you as a source of additional strategies as markets become more crowded with algorithms.
- They can also be used to find even better timing of entries so that positions get in before others.
If you liked this post, give it a boost 🚀 and drop a comment so we know to publish more for you. Cheers!