Elliott Wave Theory is a style of “technical analysis”. For those that need a refresher, technical analysis is the study of past volume and price movements in order to predict future ones. The crux of this style of analysis is to look for patterns in past prices … such as trends, support & resistance and other chart patterns, in order to identify what is a next likely market moved based upon what has happened previously when those patterns have appeared.
People who use technical analysis are typically more traders than investors in that they have a shorter time frame for their investments such as days or weeks. When you are buying and selling over a short period you can’t rely on the fundamentals of a company because reports about the company’s financial reports do not come out that regularly. Therefore you are more likely to rely on news and rumours about that company.
Technical analysis is a method for analysing those news and rumours because it is generally believed that if someone has good information about a particular company’s future performance, then they are likely to either buy or sell that stock. That buying or selling activity will create “patterns” that we can see in our charts. Even if we don’t know the exact reason, we can spot the patterns that mean a number of people are starting to buy a stock or starting to sell a stock.
We can see these patterns in not only the stocks price, but also in the volume and even the movements in its options. Because both price and volume are quantitative figures, it is easy to compare historical figures to the present. This has allowed technical analysts to build a wide array of techniques and statistical models (called indicators) designed to understand current market conditions and help predict future ones. These indicators range from the simple, such as a moving average, to the more complicated, such as a MACD. As you’ll discover in any technical analysis text, there are hundreds of technical analysis indicators to choose from. Our focus is Elliott Wave and a small number of indicators that compliment Elliott Wave and can act as a filter to help picking the right trades.
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