Home Technical Analysis Elliott wave theory Understanding the Nature of the Wave

Understanding the Nature of the Wave

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The Elliott Wave theory is a popular method currently applied to the analysis of the financial markets. In this articles series, we will explain the theory developed by R. N. Elliott in the first half of the 20th century.

Understanding the Nature

We can accept as a rule that the Universe is ruled by physics laws, and without these laws, there would be chaos or nothing. Similarly, other scientific disciplines have their particular rules that govern them.

Although usually it is not known what causes an event, continuous observations allow us to understand the phenomenon. The simple experience granted by observations provides the basis to devise general rules and make predictions. Even without the need to understand what is the underlying cause of the event.

For example, throughout the months of the year, there are different seasons, summer, autumn, winter, and spring. The Moon has regular cycles, Ancient people didn’t know what was the true reason for the moon cycles or the seasons, but by observation, they could predict what would be the next moon phase or season.

Human Activities and the Nature of the Wave

We, humans sometimes have intuitions about the cyclic nature of some natural behaviours. For example, a person who usually travels by bus can predict with certain accuracy how much longer will take the next bus will to arrive, even without knowing the underlying cause. Another example, a farmer according to his observation and experience knows when it is the right time to seed and harvest.

Socio-economic events are not an exception to the laws of nature. A common sentence that fits this observation is “the story repeats itself over and over again.” There is no clear reason for its origin, but we know there are lots of examples of history repeating itself. For example, consider the United States Consumer Confidence Sentiment. Please note that consumer confidence moves in repetitive cycles with well-defined impulses or waves.


source: tradingeconomics.com

Financial Markets and the Wave Principle

Financial markets have allocated a considerable amount of resources without significative positive results. Financial markets, being a human socio-economic activity, are also subject to the laws of nature.
 
The key to success in financial markets lies in understanding that it is a “psychological phenomenon” dominated by greed and fear. In summary, the movements of the markets follow a sequence ordered over time. This rhythmic sequence is the Wave Principle.
 
The Wave Principle always has existed and applies to every human activity. In financial markets, each asset has its waves and does not need the confirmation of another financial asset.
 
In our next post, we will talk about Waves in Financial Markets and its Identification.

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