Elliott Wave

Last modified 13:54, 5 Nov 2012

Elliott Wave

This Hi-Lite is based on the theories of Ralph Nelson Elliott, who, during the 1930’s, observed that stock markets move in a series of rhythmic patterns which are based on a natural progression of shifts in mass investor psychology. As market participants vacillate between greed and fear, price patterns develop. These price patterns are called "waves’.

Elliott discovered that there were two basic types of wave patterns:

  • Impulse Waves consisting of five waves, which collectively move in the direction of the main trend of the market, and
  • Corrective Waves consisting of three smaller waves, follow the impulse wave series and move counter to the market's main direction.

He further discovered that each wave, whether impulsive or corrective, subdivides into smaller waves and/or comprises a part of a larger wave. Waves can, therefore, be analyzed in time periods ranging from a matter of minutes to many centuries.

The most difficult part of Elliott Wave analysis is correctly labeling and counting the waves. A correct wave count can lead to amazing accuracy in forecasting the market. An incorrect wave count will, of course, have the opposite result.

Elliott Wave Display

Your SOFTWARE provides a basic display of consistent wave counts, which allows users to recognize familiar trade patterns. It is a simple and consistent method of establishing market direction.

Elliott Wave theory is a wide ranging technical analysis discipline. with a tendency to become very complex, especially when used over short periods of time for day to day trading purposes.

Your SOFTWARE's Elliott Wave algorithm applies basic Elliott theory, using a number of oscillator and momentum filters to identify and match broad based impulse and corrective waves in a security's price movement.

Your SOFTWARE's Elliott Wave Hi-Lite has four main components:

ellwav_wordsml.gif

Starting Data Point

The starting point is 300 trading days ago.

Three hundred trading days have been found to be optimal for the filters used by Your SOFTWARE to identify Elliott waves.

The number of trading days to be covered by each analysis can be changed by the user in the Data Points text entry box of the Elliott Wave Settings dialog box, see below.

Impulse Waves

The software analyses the entire range of data points and identifies sets of Impulse Waves. Impulse waves occur in groups of five, the relationships between the various waves' range and retracement are subject to strictly defined rules. These rules make up part of the analysis used by Your SOFTWARE to identify the wave patterns.

Calculations of relative oscillation and momentum are also part of the wave detecting algorithm.

Impulse waves can move in either direction: up or down.

When the waves are identified, they are numbered 1 to 5 at the end of each wave.

Three of the waves (numbers 1, 3 and 5) determine the overall price trend of the security. These three directional waves are separated from one another by two counter-trend interruptions, the waves numbered 2 and 4.

Until the 4th and 5th waves are confirmed, their wave-point icon will be aqua colored.

As mentioned previously, there are strict rules which apply to the relationships between each of these waves. For example:

1.  Wave 2 never ranges beyond the starting price level of Wave 1

2.  Wave 3 is never the shortest wave

3.  Wave 4 never enters the price territory of Wave 1

If the rules (and others) are not met, the formation will not be identified as an Elliott wave on the price chart.

Corrective Waves

After the Impulse wave, a pattern of correction in the opposite direction from the impulse wave occurs.

This corrective phase is characterized by a 3 wave pattern. Again, rules regarding the relationships between the volume, momentum, and oscillation characteristics of these waves provide the basis for their identification as corrective waves by the software.

The ends of these corrective waves are identified by the letters A, B and C on the price chart.

They in turn, will set the stage for the next group of Impulse waves.

EBOT (Elliott Break-Out Trigger)

For waves 3, 4 and 5, a trigger line created from a standard deviation calculations can be plotted.

These lines go above or below the price chart's bars, depending upon the direction of the wave.

When they pass through the price chart, they will stop. If the chart later reverses, they will reappear.

They are a signal of a possible wave reversal.

Their parameters can be adjusted and their display can be turned on or off, see Elliott Break Out Trigger (EBOT) settings below.

Time and Price Projection (TAPP) lines

Once a strong impulse and corrective wave patterns have been identified, it becomes possible to extrapolate the trend into the future, and make projections of possible price targets on the price chart.

These projections can only be made for the 4th and 5th waves, the full extent of the 3rd wave must be known before the projections can be made.

These projections are referred to as time and price projections because they plot projection lines based on ranges of dates and prices generated using the same data and calculations used to identify the Elliott waves.

The appearance and parameters of the projection lines can be controlled by the user.

Elliott Wave Display Settings

The Elliott Wave Settings dialog box configures the parameters and display of the Elliott Wave Hi-Lite.

Open the dialog by double left mouse clicking the Hi-Lites label or one of the wave point icons.

It consists of two groups of properties settings: General and EBOT

General Settings

ellwav_genrlprops.png

Data Points

This is the range of trading days that are included in the algorithm that produces the Elliott Wave calculations.

The default of 300 is used because it is suitable for the settings and filters employed in Your SOFTWARE's basic Elliott Wave algorithm. Users may enter a different value.

Oscillator Short and Long Periods

The settings for the oscillator used to calculate the Elliott Wave can be set from this dialog.

Type in the number of periods for calculating the short and long periods.

Display TAPP (Time and Price Projection)

Check the box to show the Time and Price Projection for the next 4th and 5th wave. Refer to the discussion above, for more information.

TAPP Settings

Click the Settings button to open the Time and Price Projection Properties dialog boxes.

The TAPP settings dialogs are described below.

Elliott Wave Point Style and Appearance

Different colors can be selected for both the Wave Point and ABC point symbols.

There are also a couple of different display styles for the Wave Point icons.

EBOT (Elliott Break Out Trigger) settings

The bottom half of the Elliott Wave Settings dialog box contains the EBOT parameters:

ellwav_ebotprops.png

Display

Check the check-boxes for the EBOT lines to be displayed for each particular wave.

Level

Type in the EBOT Level to be used in the EBOT line's standard deviation calculation.

Enter a whole number, the default is 2.

Style / Color

Use the drop-down selectors to change the line style and color.

Show All Line Segments

For each wave there are usually more than one EBOT line. When an EBOT line intersects the price chart it will terminate. If the wave continues after this point, a new EBOT line often begins to form. A number of terminations and new lines can be plotted for each wave.

By default the Show All check-box is unchecked and only the last EBOT line for the wave will display.

Check the Show All check-box to display all of the EBOT lines that have been plotted for the particular wave.

Apply Changes

Click OK to apply the changes.

Click the Default button to change the default settings. Refer to the Default Settings topic for more information on changing the default settings.

Time and Price Projection (TAPP) Parameters

Time and Price Projections (TAPP) are calculated based on statistics generated from comprehensive back-testing of historical Elliott Wave patterns across thousands of stocks over time. These calculations allow the software to plot projections of possible price targets onto the price chart.

These projections are referred to as time and price projections because they plot projection boxes based on ranges of dates and prices generated using the same data and similar calculations used to identify the Elliott waves.

Users can control the manner of calculation as well as the display of the TAPP lines and labels.

To open the Time / Price Projection properties dialog box, roll the cursor over the TAPP lines, the cursor will change to a pointing hand. Double-left mouse-click to open the dialog box.

Hide/Show Time and Price Projection Lines and Labels

To display the lines and labels, check Display TAPP check-box in the Elliott Wave Settings dialog box:

ellwav_tappchkbx.png

Each element in the display can be individually adjusted by the user in the Appearance section of the Time and Price Projection Properties dialog box, see below.

TAPP projections can only be made for the 4th and 5th waves, and the full extent of the 3rd wave must be known before the projections can be made.

TAPP 4 Line Display

ellwavtappswitch.pngTAPP projections for 4th and 5th waves will display by default.

However, once the Elliott Wave Point 4 is confirmed, the projection lines for the TAPP 4 price target area will, by default, be hidden and the actual Elliott Wave Point 4 will be plotted.

The Elliott Wave Point 4 may change, and its calculation is subject to a number of rules. It is subject to change based on the closing price of each trading period.

Users may wish to see where the actual Point 4 is located in reference to the projected target area.

To display the wave 4 projection target area on the price chart, select Always Show Target in the Elliott Wave pop-up menu (see right), this will over-ride the default and the projection will be displayed, along with the current Elliott Wave Point 4.

Projection Calculation

Time/Price Projections can be calculated using a number of different projection types and calculation methods.

Each method has a different algorithm, as well as different variables and parameters.

Time and Price ranges will define a target box. Changing the method or parameters of the time calculation will lengthen or shorten the timeframe. Changing the method or parameters of the price calculation will result in a different target price range. See below for more details.

Your SOFTWARE allows the user to choose between 4 different methods:

  • Statistical Probability applied to both Time and Price Calculations of waves 4 and 5 (system settings, no user input) - (This is the Default setting)
  • Fibonacci Ratios applied to both Time and Price Calculations of waves 4 and 5

and a mixture of the two processes:

  • Statistical Probability for Price Calculation and Fibonacci Ratios for Time Calculation
  • Fibonacci Ratios for Price Calculation and Statistical Probability for Time Calculation

Select a projection method in the top of the Time/Price Projection Properties dialog, and its controls will open in the lower part of the dialog box.

Statistical Probability (system generated settings)

When Statistical Probability is selected no user defined parameters are available.

All calculations are system generated, and the dialog's user selection boxes are disabled.

ellwav_tappstatsprobstngs.png

Statistical Probability is the default setting for both Time and Price Calculations.

Statistical Probability TAPP Display

The resulting TAPP display has a number of elements unique to the Statistical Probability settings:

ellwav_tappstatsprobdisplay.gif

Wave TAPP 4, or both Waves 4 and 5's TAPPs, can be displayed if the formation is sufficiently developed.

The Timeline Display shows the final date of the TAPP target timeframe. Its display can be toggled on/off in the Time / Price Projections dialog box, see above.

The initial price level of the TAPP target price range displays above the price level. Another line, above in a long formation, and below in a short, indicates the extreme price level of the TAPP.

Fibonacci Ratios

Selecting Fibonacci Ratios for either the both Time or Price Calculation will enable the user definition text boxes for the 4th and 5th Waves:

ellwav_tappfiboncistngs.png

Widely accepted Fibonacci values are employed as the default parameters.

Time Calculation Settings

For either Wave 4 or Wave 5, Fibonacci ratios are used to calculate the Start and End dates for the projected timeframe of the target area.

The default Fibonacci ratios are shown in the graphic above.

Users can alter the defaults by entering new ratios into the text boxes.

Note - The Display Timeline function does not operate in the Fibonacci Time display mode.

Price Calculation Settings

Again, for either Wave 4 or Wave 5, Fibonacci ratios are used to calculate the Start (lower for long markets, upper for short markets) and End (upper/long or lower/short) price levels for the projected target area.

For either wave, the Fibonacci setting will also calculate an additional price level Line, which appears above the End line in a long Elliott Wave formation, and below it in a short formation. This line is plotted using a third Fibonacci ratio.

The default Fibonacci ratios are shown in the graphic above.

Users can alter the defaults by entering new ratios into the text boxes.

Fibonacci TAPP Display

The resulting TAPP display has a number of elements unique to the Fibonacci settings:

ellwav_tappfibncidisplay.gif

Wave TAPP 4, or both Waves 4 and 5's TAPPs, can be displayed if the formation is sufficiently developed.

Three Fibonacci price levels are plotted for the TAPP target price range.

The time period of the Fibonacci TAPP target is indicated by the length of the three price level lines.

Mixed TAPP Displays

As mentioned previously, it is possible to create TAPP displays using a mixture of the two processes:

  • Statistical Probability for Time Calculation and Fibonacci Ratios for Price Calculation
  • Fibonacci Ratios for Time Calculation and Statistical Probability for Price Calculation

Mixed Display Features

The statistical probability calculations are internal, and the parameters entry boxes will be disabled.

The statistical probability Timeline Display can be activated when Statistical Probability is selected for the Time Calculation.

The statistical probability initial price level will be displayed when Statistical Probability is selected for the Price Calculation.

The default Fibonacci levels can be altered by the user typing new values into the enabled text entry boxes when Fibonacci Ratios is selected for either process.

Three Fibonacci price levels will be displayed when Fibonacci Ratios is selected for the Price Calculation.

Time and Price Projection Display

The display of the Time and Price Projection elements, including both the lines and text can be set by the user.

These settings are found in the Appearance section in the lower half of the Time and Price Projection Properties dialog box:

ewtimpricdsplyprps.png

The above settings will result in the following Time and Price Projection display (each display element is named and identified by an arrow):

ewtimpricdisplay.gif

Hide Time and Price Projection Display

Un-check the Display Timeline check-box to hide the display of the Time and Price Projection Lines and Labels.

Check the check-box to toggle the display back on.

When the Time and Price Projection Display is hidden using this feature, the display of the original Elliott Wave formations will not be affected.

Note - Whether the Projection label and Price Lines for target 4 is displayed, depends on the Always Show Target setting in the Elliott Wave Pop-up menu, see discussion above.

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