Wave theory is a price trend analysis tool, which analyzes and predicts the future trend of prices according to the fluctuation law of the cycle.
Under the wave theory, the market, like the waves of the sea, rises and falls rhythmically and regularly. Investors can feel the rhythm and coordination contained therein and grasp the market accurately.
There is a saying about foreign exchange: “Dow theory tells you what the sea is, and wave theory tells you how to surf the sea.”
The securities analyst Ralph nelson elliott, with the dow Jones industrial average (DJIA DowJonesIndustrialAverage) as a research tool, found that changing the structural form of foreign exchange reflects the natural harmonious beauty, puts forward a set of related market analysis theory, and predictive value of the principle of special emphasis on volatility.
This is known as the Eliot Band Theory, or wave theory.
Three Principles of Wave theory As far as wave theory is concerned, it mainly includes three principles, namely, the principle of modified wave depth, the principle of Fibonacci and the principle of alternations.
1. Corrected wave depth principle The corrected wave depth principle is used to measure the correction wave retracement amplitude. Usually, the corrected wave will reach the low point of 4 waves of a smaller level.
In the strong market, only new highs do not record low, at this time a small level of 4 waves low will be a good resistance level, investors can use this to follow up and stop losses.
2. Fibonacci Principle The Fibonacci principle is that the volatility ratio presents a Fibonacci sequence.
For example, 3 waves are 1.618 and 2.618 of 1 wave;
2 waves back to 0.382, 0.5, 0.618 of 1 wave;
4 waves back to 0.382, 0.5 of 3 waves;
5 waves is 0.618 of 1 ~ 3 waves, and this principle is also presented in terms of time.
There are three reasons for this ratio, as shown in Table 1-1.
Table 1-1 Reasons for the ratio of Fibonacci Principle of wave theory 3. Principle of Alternations The alternations principle, namely, the alternations principle of simple and complex, rising and falling, pushing and adjusting, and regular and irregular, shows the alternations of corrected waves, as shown in Figure 1-2.
The promotion and adjustment of the principle of alternation are mainly manifested in the following three aspects.
(1) Small adjustments match small push, therefore, if the present is a small level of adjustment, then it is necessary to do a good job of small push operation plan.
(2) The medium adjustment also indicates the medium push, so if the present is a medium level adjustment, then it is necessary to do the operation plan of the medium push.
(3) the big adjustment is in the accumulation of a wave of big push market, therefore, if the present is a large level of adjustment, it is necessary to do a good job to promote the operation plan.
FIG. 1-2 Alternating Principles of Wave Theory IV. Morphology of Wave Theory The application of wave theory holds that the market trend repeats a pattern, consisting of 5 rising waves and 3 falling waves in each cycle, as shown in FIG. 1-3.
Figure 1-3 Theoretical pattern of waves The first five waves are the main movement direction of the foreign exchange market, and the second three waves are the secondary movement direction of the foreign exchange market.
Wave theory uses “five rises and three falls” to reveal the trend operation law of the foreign exchange market.
The eight-wave movement process of “five rises and three falls” is also a complete circular process of the foreign exchange market.
FIG. 1-4 shows the introduction of the two main categories of pushing waves and adjusting waves in the theoretical morphology of waves.
Fig.1-4 Introduction of Pushing Wave and Adjusting Wave in Wave Theory V. Main Defects of Wave theory The defects of wave theory are mainly reflected in six aspects, as shown in Figure 1-5.
Figure 1-5 Main Defects of Wave Theory Summary: Wave theory is a tool of special value, which is manifested in its universality and accuracy.
By universal, we mean that we can use it in many areas of human activity, many times to incredible effect;
To say it’s accurate means it’s incredibly accurate at identifying and predicting changes in trends.
This is unmatched by other analytical methods.
At the time, exactly half an hour before U.S. stocks bottomed, Elliott predicted that there would be a big bull market in the coming decades.
His prediction is a stark contrast to the still-bear market.
At the time, most people did not dare to imagine the Dow Jones Industrial Average surpassing its 1929 high of 386 points.
But it turns out the wave theory was right!
Wave theory is one of the most widely used and difficult analytical tools in technical analysis.
Like Dow theory, wave theory is mainly used to analyze exponents.
I believe you have read the wave theory introduced by the above small series, and know it well. Finally, I wish you a lot of practice trading and make more money.
