12.08.2020
The Elliott Waves Theory

The Elliott Waves Theory: Surf instead of drowning

Have you ever wondered how fortunes are created? Money can be made literally out of thin air, with the right insight and proper analytics. 

What if we knew to jin Satoshi Nakamoto in one of the countless forums back in 2009, and have the wisdom to install his code on our PCs as Hal Finney did? Imagine installing something on your machine in the morning that makes you 50 Bitcoins before dinner. 

Of course, no-one knew at the time they would be worth $20 000 apiece at their highest peak. Today’s drops from that level fit perfectly with the highs and lows that characterized Bitcoin’s highs and lows throughout the year, so it probably makes sense to hold on to it. How did we know that? Analytics. How did we not know enough about Satoshi’s brilliant idea and what crypto market would become – ten years ago? We weren’t a fan of analytics back then. 

The bottom line is, the right kind of knowledge produces real results. The Elliot Wave Theory in crypto is a fantastical example. 

More examples? Tim Draper bought a bunch of Bitcoins (more or less 30 000 of them) at a time when no-one believed in them. How much money do you think he made now that they’re worth $5 000? 

This teaches us two things.

  1. Should have done the research back then and bought some. 
  2. Should have said yes to the Universe. 
  3. It’s not too late. 

If Tim Draper’s prediction is anything to go by (and he’s an expert), you could wait a while and still sell your Bitcoins five years down the line at least twenty times more than what they’re worth now. And what makes us so sure our (and Tim’s) answer is correct? You know the answer. 

Elliott waves basics

All good decisions are based on science. From learning how to walk to flying a plane, you either have good intel or you don’t. In every case, including crypto, if you don’t, a short drop and a sudden stop are pretty much guaranteed. A top plan is about all parts – logistics, alternative opinions, hard data, adaptation, improvisation, overcoming. 

So you’ve probably heard about technical analysis (and Elliott Waves as a part of it) before. It gets a little technical, but, in brief, certain laws run all things. You want to cross a street at a street crossing instead of diving headfirst into traffic is because you know there is a significantly higher probability of survival there. 

Unless you’re from New York where traditionally people just walk into moving traffic, you know, based on your previous experience, that there are factors that will dictate where you should go. 

Moving traffic

Technical analysis takes into account what did happen and what is happening to give you an accurate indication of what will happen. Again, there are some scenarios where not all rules apply (like in New York) or not all rules will work (like in Russian where you use the crossing but die anyway) or some will and some won’t, and the result is unpredictable. 

That’s why technical analysis is not a guarantee of success. But all things considered, it’s much better to have a plan – and using a crossing is a lot safer (though it doesn’t guarantee that the next time you cross you’ll be ok). 

I have never seen a market unfold in other than an Elliott Wave pattern. — Robert Prechter

Elliott Wave trader’s cryptocurrency experience

Elliott Waves are a method of statistical analysis that takes into account colossal amounts of past and present data to enable you to predict, with some certainty, where an asset’s price is going. 

Three warnings here. 

First, as I already stated, technical analysis is not about guarantees. 

Second, if you’re going to use the Elliott Wave theory, you really ought to read the heck out of a couple of good books about it. Here’s where to start. 

Be warned! Technical analysis is like flying a plane. If you think playing GTA on your console will make you a good pilot, try walking into a cockpit mid-flight and think about being responsible for the landing. There are a lot of buttons. And you don’t want to get them wrong. So if you’re going to start getting intimate with this kind of technical analysis, this brief article will be a good starting point, but you really should read the books before you begin. And don’t forget to trade with demo accounts first if you’re just getting into it. 

Final warning 

Warning

No technical analysis tool will give you a complete guarantee of a result. Failures at the beginning (and in later stages) are inevitable. Make sure you learn the basics, work with feedback, and take into account the guidelines – and slowly the number of times when you lose money will lower. 

The Elliott Wave Principle is not perfect. And it’s not meant to be. Its advantage (remember our crossing example?) is that it gets you more wins than losses. So be smart, trade in small increments, and you will be profitable consistently (although maybe not in a snap of a finger). Learning to spot Elliott Waves indicators right may take you a year or so.

Usual rules apply: don’t work with borrowed funds (ideally), don’t get into irresponsible betting, and stay in control.

Elliott Wave Theory in Crypto

The Elliott Wave Theory was invented by a professional accountant Ralph Nelson Elliott who out of boredom analyzed colossal amounts of graphs dating back to almost the beginning of the market – and found there were repeating patterns of waves in all things (but also markets). 

Graths

Essentially, the stock market process followed the same principles that could be predicted next time given enough information. It was later proved that, if you took all the knowledge into account (and read the books) wave movements could be predicted with 90% accuracy. 

The fact that that was possible someday, however, still does not guarantee results, which why it’s important to trade small (best not to invest more than 6% of your total amount of assets on any given day). 

Learn to use Elliott Wave Moving Averages here

This is probably the most complete account of Elliott’s view so far. 

Elliott waves explanation in simpler terms

Just like there is a natural order in waves flowing onto a shore, there are movements in mass psychology that go from pessimism to optimism. 

Robert Prechter, who is perhaps a living example of how to invest and make money on the market, explained the theory briefly in this article. 

Actually, let’s throw in this book too: Glenn A. Neely’s “Elliott Waves in Motion”.

Elliott Wave Rules

Elliott discovered all price movements in the bear market or a bull market form waves that repeat themselves. A wave is a clear movement in price. All waves come in sets. For example, if you look at the charts for the past markets, you can see that there is normally the same pattern in which events happen (a conclusion Elliott came to after analyzing thousands of graphs). This is a typical Elliot Wave analysis of price action:

Relatively nothing

Everything is relatively calm. There are insignificant changes.

First Wave 

There may be one wave that happens when there is good news (maybe press releases indicating increased demand). Bad news also means patterns in accordance with the Elliott Wave principle. There may be a significant raise. The trend may be changing. In any event, there is a big up and most people are skeptical. 

Second Wave

Waves come with corrections. Corrections are when the price goes in the opposite direction (although it may not be as strong as the original wave). When this correction hits it may come back strongly, but never below the level where the original wave started. Normally it’s around 60% of the 1st wave. 

This happens because when the price of an asset starts going up (maybe someone found out Google or JP Morgan Chase is now using the asset officially), and serious investors start selling to make profits. This means there is more of the asset on the market, and it’s becoming cheaper. Correction! 

Third Wave 

There is a third wave (I can’t stop thinking about Hawaii50 all the way through this). This is where everyone is starting to try to surf. People are beginning to believe that the asset is genuinely going up in price and that it wasn’t hype or fake news. Volumes are growing. The third wave is the most massive, and on average it’s south of 1,5 times the size of the 1st. 

Fourth Wave 

Second correction (4th wave). Some are making profits and selling quickly. That causes a second correction. This wave is not a huge downer, because everyone is believing the time is now and the general trend is still pointing upwards. Usually comes to about 40% of wave 3. 

Fifth Wave 

The fifth wave is still happening because volumes are growing and the traders believe that the time to buy is now, although the general level of excitement starts to lower in intensity. 

  • Wave A is general optimism but strongly fading movement upwards. The mood is uncertain but mostly optimistic. Very similar in nature to wave 1. 
  • Wave B shows insignificant movements upwards. There isn’t much optimism left. 
  • Wave С shows strong movement down (in the opposite direction the stock was going). There’s pessimism about possible movements up. 

Therefore, waves can be seen as going in a cycle of 8. There were 5 and A, B, and C. Out of those waves 5 would go in one direction and A, B, and С in the other. Out of the 5 waves going in one direction, 3 of them would go up (1,3,5), each followed by one going down (2, 4 are corrections). Small waves form greater waves and smaller patterns are mirrored by the larger ones.

Premium math 

There are specific correlations between wave sizes. For example, the wave at the lowest point of the market (C) will not last more than 1.618 times of wave 3. Based on these principles, certain results can be predicted. Again, before you bet your kids’ university fund on Wave 3 you must read the book or watch 10 hours of videos like this one:

One example where studying principles in-depth is crucial is Elliott wave day trading.

I know a trader that is a very good trader, and he bases a lot of his trades on Elliot Waves, but he too gets literally killed by ignoring context. Reddit

Elliott corrective waves and impulse waves

Put simply, waves come in cycles of 5 (that raise the market) and 3 (that drop it). Five waves, therefore, are bullish. Three are bearish. The bullish phase consists of 3 waves going up with 2 waves of correction after each. The wave changes that go in the direction of the general trend are called impulse waves. 

Elliot Waves Guidelines

  • The minimum level that wave 3 will reach is the bottom point of wave 2 plus 1.618 of Wave 1. 
  • Of the three impulse waves, one (number 3 or number 5) is the biggest. The other two are equal.
  • A strong trend is followed by a correction of 38%. A weak trend is followed by a correction of 68%.

And so on. 

Using these principles, you can make educated guesses about the nature of the next shift. However! There is no way of covering all the nuances in these articles, so we insist that you read the book before starting work on the real thing. 

Finally

Elliott Waves diagonal

This guide cannot be considered a manual or instructions on trading because its purpose is to give you an idea of the concept so that it’s easier to make sense of the more complex research. Watch out for triangles, double horizontal corrections, etc. What is an Elliott Waves diagonal? Elliott Wave labeling also is a separate subject.  

Certain predictions can be made about the nature of price moves using this method. According to some sources, with 90% accuracy. 

Also, there is a lot of criticism of this theory. The main problem is that the Elliott Wave Principle can be seen in past markets but you have to have a lot of expertise to use it with any degree of success in real life. 

Where’s a good place to try out Elliott Waves for yourself? Nominex, a well-known exchange with a penchant for stablecoins and benchmark security, offers all features required for you to relax, get safe, make the right decisions, and ponder the finer nuances of trading – while your money makes itself. 

This method is genuinely considered to work by some experts, so it deserves a shot. Make sure you come prepared. 

We welcome you to share this article with your friends if it was useful. If we created some value and served you pay it forward by allowing everyone to learn, get better, and use Elliott Waves to make some money!

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One Comment

  1. talkshow Reply

    I love what you guys are usually up too. Such clever work and exposure!
    Keep up the good works guys I’ve included you guys to my personal blogroll.

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