Back in
the old school days of the 1920-30s, there was this mad genius and professional
accountant named Ralph Nelson Elliott.
By
analyzing closely 75 years worth of stock data, Elliott discovered that stock
markets, thought to behave in a somewhat chaotic manner, actually didn't.
When he
hit 66 years old, he finally gathered enough evidence (and confidence) to share
his discovery with the world.
He published his theory in the book entitled The Wave Principle.
According
to him, the market traded in repetitive cycles, which he pointed out were the
emotions of investors caused by outside influences (ahem, CNBC, Bloomberg,
ESPN) or the predominant psychology of the masses at the time.
Elliott
explained that the upward and downward swings in price caused by the collective
psychology always showed up in the same repetitive patterns.
He called
these upward and downward swings "waves".
He
believes that, if you can correctly identify the repeating patterns in prices,
you can predict where price will go (or not go) next.
This is
what makes Elliott waves so appealing to traders. It gives them a way to
identify precise points where price is most likely to reverse. In other words,
Elliott came up with a system that enables traders to catch tops and bottoms.
So,
amidst all the chaos in prices, Elliott found order. Awesome, huh?
Of
course, like all mad geniuses, he needed to claim this observation and so he
came up with a super original name: The Elliott Wave Theory.
But before we delve into the Elliott waves, you need to first
understand what fractals are.
Fractals
Basically,
fractals are structures that can be split into parts, each of which is a very
similar copy of the whole. Mathematicians like to call this property
"self-similarity".
You don't
need to go far to find examples of fractals. They can found all over nature!
A sea
shell is a fractal. A snow flake is a fractal. A cloud is a fractal. Heck, a
lightning bolt is a fractal.
So why
are fractals important?
One
important quality of Elliott waves is that they are fractals. Much like sea
shells and snow flakes, Elliott waves could be further subdivided into smaller
Elliot waves.
Ready to
be an Elliottician now? Read on!
