Chapter 16, Part I. Elliot Wave Theory. Page 3

Commander in Pips: In fact, followers of EW theory who do apply it in practice try to estimate the definite wave that is taking place currently. This allows them to estimate further price movements and potential reversal points.

Pipruit: Hm, it looks not too difficult.
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Commander in Pips: You’ll have the chance to check this statement in practice, son, but now the second important part of the theory. The EW theory is based on idea of “compounding” or fractals. In general, a fractal is a type of structure of some object, where part is similar to whole thing. And the whole thing consists of repeatable parts. The most obvious example is a snowflake, but there are many others examples of fractals in our world. This quality also comes from nature and because of that it is also suitable for EW Theory.

Pipruit: That was some magical abracadabra, right?
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Commander in Pips: Ok, I’ll show you. This is a picture of snowflake, right? This is a fractal, because - see the rays of snowflake – they are absolutely similar to each other, but the whole snowflake consists of such repeatable rays.

Pipruit: All right! Looks like I’ve got it. But how it could be applied to EW?​

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Commander in Pips: Very simple – here is a complete market cycle according to EW theory. First, we see two major swings – one swing up, and one swing down. Then swing up divides on 5 waves, marked with [1]-[5], while downswing on three waves [A] – [C]. Each wave is divided on sub waves, but they look absolutely akin. This is fractal. See – the move from the initial point to [1] consists of 5 waves that marked with (1)-(5). But the whole swing up also consists of 5 waves.

Pipruit: Cool, I’ve got it. But how somebody could clear up such a mess?​

Commander in Pips: You get to the root of this method, son. This is relatively simple to estimate the waves on the past price moves, but much harder to do it in real time and make a forecast. But, in general, it could be done.

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P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.



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