Saturday, 17 October 2009

Dow and Elliott Waves

HARD Right Edge Theory Dow has more than 100 years. So, the idea that Charlie Dow have to offer modern traders?

One of the most powerful concepts in the Dow is three - wave principle. A decade later, after the Dow wrote about this principle, RN Elliott has created its unique Elliott wave theory. So, let's try to combine their work and see what they wrote decades ago.

Three waves Dow had been built on the concept of the primary trend. We all know what Charlie said here. The primary trend (or the main trend) - the main market area for several years. Through him, we define, we are in bull or bear market. Dow determined that the primary trend, looking at long-term price patterns and seeing the obvious.

Elliott used his five - wave trend to reach the same conclusions. He noted that the primary trend is composed of three waves, moving in the direction and two waves moving against it. In addition, each primary wave consists of a smaller wave structure, which shows the true nature of price direction. For example, Elliott said that the failure peretekanie show some waves within this fractal structure and cause Facing the trend.

According to Dow theory, the market tend to have higher peaks and higher reduction, shows a primary bull trend. On the contrary, the market, marking the lower peaks and lower reduction, shows the primary bearish trend. Elliott did not have any problems with this approach, but he added a few of their own refinements. For example, he pointed out, as some stages of the primary trend showed a very limited opposing waves and rarely updated, yet complete set of waves has not been completed.

Three - the principles of the wave becomes more interesting when Dow and Elliott describe the typical behavior of crowds in each of these waves. Let's explore them through the bull market cycle.

The first wave is the purchase of undervalued assets patient investors who expect better economic conditions and long-term growth. This happens at the very time when the crowd showed their most pessimistic mood, but experts reassure all stay out of the financial markets. Investors in undervalued assets are coming out of stupor and realize that prevailing in the markets of apathy hides the nascent recovery. They insist to buy from vendors are concerned and provide a viable base.

Elliott noted that the first wave shows very gradual improvement in price and often back to test lower levels. He also pointed out that this wave requires a lot of time to complete and provides a true bottom of the graph. A positive factor is that the market will eventually cause the momentum, enough to push prices to much higher levels.

Bull confidence begins to rise during the second wave of Dow. Improved corporate earnings, generate employment and unexpected innovation characterize this mid-wide bovine movement. More and more investors are now included in the market because they see better times ahead and want to participate. They form a good portfolio and begin to follow the markets with great interest.

Elliott sees this wave as the most reliable stage bovine full cycle. Price movement is advancing rapidly, with fewer overlaps with the day to day. Small GEPy appear between the bars, as investors buy high and hope to sell even higher. The sharp increase often GEO straight in the middle of the waves, when an explosion of enthusiasm creates a wide GEO continuing. This is a very strong movement frequently points to the exact middle of the full three - wave scenario.

Signs of danger are increasing during the third wave of Dow, but they are difficult to take into account because of the extremely azhiotazhnoy market situation. Record earnings and full employment encouraged the media to declare unlimited economic prospects. The public forgets about its losses during the recent Bear cycle. Purchases are becoming more azhiotazhny nature. At this very moment, investors who bought at the base are starting to record profits and unload their positions in the hands of thirsty public. The market will eventually exhaust its possibilities, and noted the long-term top.

The last wave of Elliott can show a parabolic spike, or the rejection of the movement before it starts. This points to the danger faced by the public when the market is at peak strength. Elliott noted that the large-scale Facing of this latest wave can be very deep and painful. As we now know from personal experience, these quick sales are common deficiencies in all bull cycles.

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