Elliott Wave: Is the Theory Based in Social Mood?
Ralph Nelson Elliott developed the Elliott Wave Theory in the 1920s by examining the underlying socio-psychological principles regarding investing habits. The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, shifts between optimistic and pessimistic extremes in natural sequences. These mood swings create patterns evidenced by market price movements shown in varying trends or time scales (weeks, months, quarters, etc.). After nearly a century, we can see that while the markets and human behavior has changed quite a bit, the primary idea, however, remains that the market and human psychology operates in a cycle that oscillates between extreme highs and lows. It seems obvious that many investors will choose to trade on these extremes, feeling comfortable because of a trending stock or share, or because of an overall rise in investing, again following the crowd psychology. Of course, the market can change rapidly during these periods, meaning investors or traders will lose money. The reality is that market trends run in patterns ranging from sub-minute changes to cycles that can take years to complete. Elliott grouped these patterns in time frames, from the Sub-Minuette to the Grand Supercycle. Our advice is to think outside the box; we already know that following investor psychology and market extremes can lead to a loss. The market is fractal by nature and creates the need for the investor to take money out of the trade, which consequently affects market volume. Understanding the nature of the market is key and relating the time frames, Fibonacci extensions and retracements, and cycles and sequences are also key. The Elliott Wave Principle gives us trends in a 5/3 configuration, which consists of five dominant waves and three corrective waves interspersed, though as we have said many times before that is not always correct.
The idea that the social mood i.e. investor or crowd psychology drives the market is denied by the simple fact that mini-second time frames make it impossible to have a crowd trade. The crowd trade can sometimes be seen in daily, weekly, and monthly time-frames, but we need to understand that the market follows a code, which can be a man-made or natural occurrence in the market. Here at Elliott Wave Forecast, we have been trying to understand this code for years, because we do not strictly adhere to the orthodox thinking of the Elliott Wave Principle. Investors can tend to avoid thinking outside the box and, like I always say, groupthink does not provide the fuel which drives growth. It takes innovate and individual thinking to get ahead in today’s market. The market’s fractal pattern always repeats in every time-frame and operates within the same Fibonacci bounds. Individuals trading from don’t have the power to cause reversals in Fibonacci extreme areas. Orthodox wavers will say the move is created due to masses of individual traders. However, we also need to think that a vast majority of traders do not use Fibonacci or Elliott Wave Theory, then how the market is still able to reverse in Fibonacci extension areas. This denies the simple fact that Elliott Wave Theory is based on social mood. We do over 7000 charts every month at Elliott Wave Forecast, and every day we have live sessions where members can learn about the sequences, cycles, and Fibonacci targets. We can demonstrate how the market runs within sequences which create trends and corrections, running five or three wave trends according to Elliott’s theory. We can also show clearly that these patterns have nothing to do with the social mood of the crowd/investors. Mr. Elliott saw the patterns and studied the most indices but lacked a study of currency or other elements which we trade in today’s market. His work was incredible for its time, but we must improve as we move forward to decode the market, not fall into the past. We believe in the idea that the market moves in sequences and cycles, we believe the sequences and cycles runs into extremes and most of the time the crowd will only notice these patterns based on those extremes. We also believe an orthodox follower of Elliott Wave Theory will not see the extreme unless in it is an Impulse 5, which might justify a reversal because of crowd actions. Though an investor might profit by entering the market as a wave begins to form, these waves run from mini-seconds cycles through century cycles and need to be understood for a long-term investment or better return. These cycles sequences have a beginning and end and those extremes, while sometimes in agreement with the crowd, have been proven wrong in the end. One thing is for sure: the crowd does not determine the market by its mood. Elliott Wave is a product of the market’s fractal nature and is just a language which is ruled by said nature and investor fluctuation in entering and exiting the market.
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