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To: Fred McGriff who wrote (65)6/11/1996 12:58:00 PM
From: Patrick Tang   of 849
 
Fred: The Elliott Wave theory interprets the broad market movements in 5 distinct phases or waves. In both bull and bear market, you can find cyclical waves that repeat themselves in the same rhythmic patterns: five movements with three separate waves in the direction of the major trend and two corrective waves against the trend. To make things complex, there are waves within a single wave and trying to interpret them could be an absolute nightmare for average investor. Why 5 waves and not 6 or 7 waves? Nobody knows (that includes Mr. Elliott). I guess if you study enough chart patterns, 5 is the predominant number statistically.

One of the weaknesses of this theory is the lack of quantitative measurement of these 5 waves. While other systems such as point-and-figure can give you a rather precise tool to "predict" the price movement, the followers of Elliot Wave often overcome this shortcoming by using their trading experiences to size the extent of the moves. Learning fast from my numerous burnt marks, I found that the third major wave, after the initial wave 2 correction, is generally longer and stronger than the first major wave. For example, if the initial wave one have a 10 point move, then I expect the wave three to move more than 10 points. How much more? 1.62 to 2.62 times. That's my estimation.

Of course this theory is not perfect, and there are pitfalls and traps along the way. What I told you is only my personal experience of this theory. So, proceed with prudence.

Happy trading!

DISCLAIMER: The above interpretation of the Elliott Wave is strictly of my own. I do not encourage or discourage the use of this interpretation. Followers of this theory will be fully responsible for their actions.

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