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
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’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
How did he label the
“degrees” of trend?
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
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.