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The Elliott Wave makes sense of the universe by describing how complex systems behave over time. From snowflakes to sports events; life is a predictable game of numbers.
Elliott Wave Theory is a mathematical principle that defines how systems evolve, from the fractal patterns of the DNA helix, to rabbit populations, to human fashions and social trends. They are all bound by the same order. The Elliott Wave is not just a superficial cycle. Given enough historical data, it can predict with reasonable accuracy where the trend will head next. It is not surprising, then, that people have applied this theory to the stock market – sometimes with extraordinary results. The Origin of Elliott WavesBack in the 1930s, Ralph Elliott, a Los Angeles accountant, was in poor health and unable to find work. This gave him plenty of time to look at stock market trends and identify why the market had lost 90% of its value in the last three years – for this was the time of The Great Depression. He concluded that the market moved in distinct cycles. Elliott’s breakthrough was that these cycles are driven by human emotions. Because ultimately, that is what the market is: thousands of participants buying and selling assets in expectation of wider supply and demand. This leads to periods of ups and downs, described as three-wave and five-wave structures, where a wave is simply an upward or downward trend. Imagine a line chart that depicts a bull market over time. A dominant five-wave trend sees waves 1, 3 and 5 as motive (upward) movements, and waves 2 and 4 as corrective (downward) movements. In a bear market the dominant trend is downward, so the pattern is reversed. The overall patterns are recurring, with certain waves setting boundary points for peaks and troughs of future waves of the same sequence. In this way, Elliott Wave analysts can pick the best time to buy and sell stocks. Elliott observed this phenomenon over small timeframes (minutes, hours, or days) as well as supercycle and grand supercycle events over multiple decades. Intriguingly, the theory has been applied to a huge range of man-made cycles, like forecasting the rise and fall of hemlines, and the next season of Major League Baseball. Crucially, all of these things are influenced by human emotion and sentiment, which links back to herd behaviour. But why do Elliott Waves appear in nature? The Fibonacci SequenceElliott Waves have a close connection with a pattern of numbers known as the Fibonacci Sequence, where each number is the sum of the previous two. This creates an infinite series of numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89… etc. Starting with a small timeframe, and gradually pulling away to view the sequence over a larger scale, Elliott Waves exactly follow Fibonacci numbers. For instance, a simple trend comprises a single wave down (1), which builds into a down-up-down pattern (3), which builds into a down-up-down-up-down (5) pattern. This process goes on indefinitely. This connection is intriguing because the Fibonnaci Sequence occurs all over nature: in the DNA helix, in sea shells, and in animal populations to name a few. Together, these theories reveal a fundamental organising principle for both nature and human behaviour. This begs the question: are humans constantly acting on nature’s predictable principles, or is life all part of a giant cosmic computer program? Either way, the idea of free will is brought into question. Further ReadingThe Basics of Elliott Wave Analysis New Scientist, Issue 2358: I Know What You’ll Do Next Summer
The copyright of the article Elliott Wave Theory in Investment is owned by Rebecca Turner. Permission to republish Elliott Wave Theory in print or online must be granted by the author in writing.
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