Elliott Wave Theory
- Plenty of people will freely offer you advice on how to spend or
invest your money. “Buy low and sell high,” they’ll tell you, “that’s
really all there is to it!” And while there is a core truth to the
statement, the real secret is in knowing how to spot the highs and lows,
and thus, when to do your buying and selling. Sadly, that’s the part of
the equation that most of the advice givers you’ll run across are
content to leave you in the dark about.
The reality is that no matter how many times you are told differently,
there is no ‘magic bullet.’ There is no plan, no series of steps you can
follow that will, with absolute certainty, bring you wealth. If you
happen across anyone who says otherwise, you can rely on the fact that
he or she has an agenda, and that at least part of that agenda involves
convincing you to open your wallet.
In the place of a surefire way to make profits, what is there? Where can
you turn, and what kinds of things should you be looking for?
The answers to those questions aren’t as glamorous sounding as the
promises made by those who just want to take your money, but they are
much more effective. Things like careful, meticulous research. Market
trend analysis. Paying close attention to extrinsic factors that could
impact whatever industry you’re planning to invest in, and of course,
Elliott wave theory. If you’ve never heard of the Elliott wave, you owe
it to yourself to learn more about it.
Postulated by Ralph Nelson Elliott in the late 1930’s, it is essentially
a psychological approach to investing that identifies specific stimuli
that large groups tend to respond to in the same way. By identifying
these stimuli, it then becomes possible to predict which direction the
market will likely move, and as he outlined in his book “The Wave
Principle,” market prices tend to unfold in specific patterns or
‘waves.’
The fact that many of the most successful Wall Street investors and
portfolio managers use this type of trend analysis in their own decision
making process should be compelling evidence that you should consider
doing the same. No, it’s not perfect, and it is certainly not a
guarantee, but it provides a strong framework of probability that, when
combined with other research and analysis, can lead to consistently good
decisions, and at the end of the day, that’s what investing is all
about. Consistently good decision making.
We use
Elliott Wave Theory in real time by looking at
the larger patterns of the SP 500 index for example. We deploy Fibonacci
math analysis to prior up and down legs in the markets to determine
where we are in an
Elliott Wave pattern. This helps us
decide if to be aggressive when the markets correct, go short the
market, or to do nothing for example. It also prevents us from making
panic type decisions, whether that be in chasing a hot stock too higher
or selling something too low before a reversal. We also can use Elliott
Wave Theory to help us determine when to be aggressive in selling or
buying, on either side of a trade.
For many, its not practical to employ
Elliott Wave analysis
with individual stocks and trading, but it can be done with
experience. We instead use a combination of big picture views like
weekly charts, Wave patterns within those weekly views, and then zoom in
to shorter term technical to determine ultimate timing for entry and
exit. This type of big picture view coupled with micro analysis of the
charts gives us more clarity and better results.
One of our favorite patterns for example is the “ABC” pattern. Partially taken from
Elliott Wave Theory,
we mix in a few of our own ingredients to help with timing entries and
exits. This is where you have an initial massive rally or the “A” wave
pattern. Say a stock like TSLA goes from $30 to $180 per share, which it
did. The B wave is what you wait for and using Fibonacci analysis and
Elliott Wave Theory we can calculate a good entry point on the B wave
correction. TSLA dropped from $180 to about $ 120, retracing roughly
38% (Fibonacci retracement) of the rally $30 to $180. The B wave
bottomed out as everyone was negative on the stock and sentiment was
bearish. That is when you get long for the “C” wave. The C wave is when
the stock regains momentum, good news starts to unfold, and sentiment
turns bullish. We can often calculate the B wave as it relates often to
the A wave amplitude. Example is the TSLA “A” wave was 150 points, so
the C wave will be about the same or more.
When TSLA recently ran up to about $270 per share, we were in uber
bullish “C” wave mode, and we had run up $150 (Same as the A wave) from
$120 to $270. That is when you know it’s a good time to start peeling
off shares. Often though, the C wave will be 150-161% of the A wave, so
TSLA may not have completed it’s run just yet.
Knowing when to enter and exit a position whether your time frame is
short, intermediate, or longer… can often be identified with good
Elliott Wave Theory practices. Your results and your portfolio will
appreciate it, just look at our ATP track record from April 1 2013 to
March 3
rd 2014 inclusive of all closed out swing positions.
We incorporated Elliott Wave Theory into our stock picking starting last
April and you can see the results:
Sincerely,
Chris Vermeulen
Founder of Technical Traders Ltd. - Partnership Program
