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Putting Elliott Wave to Work in the Markets


For many investors who are new to the Wave Principle, successfully applying wave analysis to real-world market situations can sometimes prove difficult. So what better way to learn how to reap the most from its practical applications, than a conversation with the man who wrote the book on it, Robert Prechter. Here’s an excerpt from one of his most popular titles, Prechter’s Perspective, that provides an in-depth commentary on this subject.


Prechter on The Wave Principle

What is the Wave Principle?

The Wave Principle is, first and foremost, a detailed description of how markets behave. Now, there’s probably more that is not in that sentence than is in that sentence. For instance, a detailed description of how markets behave does not refer to what outside events are occurring, such as in the fields of economics, politics, or social trends. It’s strictly a study of how human beings behave collectively in the trading arena.

What specifically did Elliott discover?

Elliott’s most important discovery was that the patterns that develop in the stock market occur at all degrees of trend. The larger patterns are made up of components that are themselves composed of smaller ones. The same patterns on a smaller scale combine to create any one of those patterns on a larger scale. The larger pattern will combine with several others of the same degree to create an even larger pattern and so on. He described in detail exactly what those patterns look like. He identified 13 of them. Only recently has data been available for general stock prices back to the late 1700s, and the patterns are there as well.

How did he label the “degrees” of trend?

Elliott began by naming a particular structure with an arbitrary label, Primary degree, a term borrowed from Dow Theory. The next larger degree he called Cycle, and the next larger Supercycle. The lower degrees he named Intermediate, Minor, and so on. We therefore have a way to refer to the degrees of trend that we are talking about.

What was the biggest degree trend he talked about?

Grand Supercycle, which he guessed dated back to the founding of the United States. Since then, more detailed stock market data has confirmed that he was right. That’s not the biggest degree, though, as all waves are components of larger ones.




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