Patterns are everywhere. We see them in the ebb and flow of the tide, the petals of a flower, or the shape of a seashell. If we look closely, we can see patterns in almost everything around us. The price movements of financial markets are also patterned, and Elliott wave analysis gives you the tools to interpret those patterns.
The Fibonacci sequence is vital to Elliott wave analysis — as a matter of fact, R.N. Elliott wrote that the Fibonacci sequence provides the mathematical basis of the Wave Principle. Once you understand the Fibonacci sequence, it’s easy to apply it to the markets you trade.
The following excerpt is from a new eBook from Elliott Wave International Senior Tutorial Instructor Wayne Gorman: How You Can Use Fibonacci to Improve Your Trading. Wayne explains how the Fibonacci sequence is derived and how it can be used to understand market behavior.
Learn how you can download the entire 14-page eBook below.
The Golden Ratio and the Golden Spiral
Let’s start with a refresher on Fibonacci numbers. If we start at 0 and then go to the next whole integer number, which is 1, and add 0 to 1, that gives us the second 1. If we then take that number 1 and add it again to the previous number, which is of course 1, we have 1 plus 1 equals 2. If we add 2 to its previous number of 1, then 1 plus 2 gives us 3, and so on. 2 plus 3 gives us 5, and we can do this all the way to infinity. This series of numbers, and the way we arrive at these numbers, is called the Fibonacci sequence. We refer to a series of numbers derived this way as Fibonacci numbers.
We can go back to the beginning and divide one number by its adjacent number — so 1�1 is 1.0, 1�2 is .5, 2�3 is .667, and so on. If we keep doing that all the way to infinity, that ratio approaches the number .618. This is called the Golden Ratio, represented by the Greek letter phi (pronounced “fie”). It is an irrational number, which means that it cannot be represented by a fraction of whole integers. The inverse of .618 is 1.618. So, in other words, if we carry the series forward and take the inverse of each of these numbers, that ratio also approaches 1.618. The Golden Ratio, .618, is the only number that will also be equal to its inverse when added to 1. So, in other words, 1 plus .618 is 1.618, and the inverse of .618 is also 1.618.
This is a diagram of the Golden Spiral. The Golden Spiral is a type of logarithmic spiral that is made up of a number of Fibonacci relationships, or more specifically, a number of Golden Ratios. For example, if we take a specific arc and divide it by its diameter, that will also give us the Golden Ratio 1.618. We can take, for example, arc WY and divide it by its diameter of WY. That produces the multiple 1.618. Certain arcs are also related by the ratio of 1.618. If we take the arc XY and divide that by arc WX, we get 1.618. If we take radius 1 (r1), compare it with the next radius of an arc that�s at a 90� angle with r1, which is r2, and divide r2 by r1, we also get 1.618.
Fibonacci-Based Behavior in Financial Markets
We can visualize that the stock market or financial markets are actually spiraling outward in a sense. This is a diagram of the stock market whereby the top of each successive wave of higher degree (in terms of the Wave Principle) becomes the touch point of an exponential expansion or logarithmic spiral. We can actually visualize the market in this sense, and we will see later on, in terms of Fibonacci ratios and multiples, how this unfolds.
This is a diagram of the Elliott wave pattern. It is a typical diagram showing us the higher degree in Roman numerals with wave I up (motive) and wave II down (corrective). One of the connections to Fibonacci ratios and numbers is that with Elliott wave, if we look at how many waves there are within each wave, we end up with Fibonacci numbers.
Learn How You Can Use Fibonacci to Improve Your Trading
If you’d like to learn more about Fibonacci and how to apply it to your trading strategy, download the entire 14-page free eBook, How You Can Use Fibonacci to Improve Your Trading.
EWI Senior Tutorial Instructor Wayne Gorman explains:
The Golden Spiral, the Golden Ratio, and the Golden Section
How to use Fibonacci Ratios/Multiples in forecasting
How to identify market targets and turning points in the markets you trade
In this video clip, taken from Robert Prechter’s interview with The Mind of Money, Prechter and host Douglass Lodmell discuss “real” money vs the FIAT money system, and what is backing your dollars under our current system. Enjoy this 4-minute clip and then watch Prechter’s full 45-minute interview here >>
Watch the full 45-minute interview FREE
Get even more valuable insights as Mind of Money host Douglass Lodmell interviews Elliott Wave International’s President, Robert Prechter, about how to keep your money safe, the deflation versus inflation debate, and many more topics that are critical to your financial future.
Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit — and more importantly, do it consistently. How do they do that?
That’s an age-old question. While there is no magic formula, EWI Senior Instructor Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don’t claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person’s life. Maybe you’ll find one in Jeffrey’s take on trading. We sincerely hope so.
The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection, Volume 4. Learn how to get 14 more actionable trading lessons — FREE — below.
Why Do Traders Lose?
If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.
Which brings us to the question: Why do traders lose? Or maybe we should ask, “How do you stop the Hand?” Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.
Fatal Flaw No. 1 — Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.
How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.
Fatal Flaw No. 2 — Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.
Fatal Flaw No. 3 — Unrealistic Expectations
Between you and me, nothing makes me angrier than those commercials that say something like, “…$5,000 properly positioned in Natural Gas can give you returns of over $40,000…” Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.
Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader — 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them — and achieve them — you will fend off the Hand.
Fatal Flaw No. 4 — Lack of Patience
The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.
That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month…I promise.
I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: “Aim small, miss small.” I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small.
Fatal Flaw No. 5 — Lack of Money Management
The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.
Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% – 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50 – $150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.
Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).
To overcome this fatal flaw, let me expand on the logic from the “aim small, miss small” movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.
Break the Hand’s Grip
Trading successfully is not easy. It’s hard work…damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.
Get 14 Critical Lessons Every Trader Should Know
Learn about managing your emotions, developing your trading methodology, and the importance of discipline in your trading decisions in The Best of Trader’s Classroom, a FREE 45-page eBook from Elliott Wave International.
Since 1999, Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. Now you can get “the best of the best” in these 14 lessons that offer the most critical information every trader should know.
Find out why traders fail, the three phases of a trader’s education, and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more!
It’s hard to believe that 2011 has passed so quickly and that 2012 will soon be here. Now is a good time to look back over the past year and assess your finances. Did your choices this year put you in better or worse circumstances? Do you have the information needed to make wise decisions in the next year? Are you prepared to protect your financial future?
The following excerpt from Conquer the Crash explains the importance of preparing and taking action now so that you’ll be ready for what’s ahead. You can read 8 more chapters from Conquer the Crash — 42 pages of critical information, including a list of imperative “dos and don’ts” — Free. Find out how below.
Chapter 14: Making Preparations and Taking Action
The ultimate effect of deflation is to reduce the supply of money and credit. Your goal is to make sure that it doesn’t reduce the supply of your money and credit. The ultimate effect of depression is financial ruin. Your goal is to make sure that it doesn’t ruin you.
Many investment advisors speak as if making money by investing is easy. It’s not. What’s easy is losing money, which is exactly what most investors do. They might make money for a while, but they lose eventually. Just keeping what you have over a lifetime of investing can be an achievement. That’s what this book is designed to help you do, in perhaps the single most difficult financial environment that exists.
Protecting your liquid wealth against a deflationary crash and depression is pretty easy once you know what to do. Protecting your other assets and ensuring your livelihood can be serious challenges. Knowing how to proceed used to be the most difficult part of your task because almost no one writes about the issue.
Preparing to Take the Right Actions
In a crash and depression, we will see stocks going down 90 percent and more, mutual funds collapsing, massive layoffs, high unemployment, corporate and municipal bankruptcies, bank and insurance company failures and ultimately financial and political crises. The average person, who has no inkling of the risks in the financial system, will be shocked that such things could happen, despite the fact that they have happened repeatedly throughout history.
Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. For now, you should focus on making sure that you do not become a zombie-eyed victim of the depression.
The best news of all is that this depression should be relatively brief, though it will seem like an eternity while it is in force. The longest depression on record in the U.S. lasted three years and five months, from September 1929 to February 1933. The longest sustained stock market decline in U.S. history lasted seven years, from 1835 to 1842, and featured two depressions in close proximity. As the expected trend change is of one larger degree than those, it should be a commensurately large setback, but it should still be brief relative to the duration of the preceding advance.
Taking the Right Actions
Countless advisors have touted “stocks only,” “gold only,” “diversification,” a “balanced portfolio” and other end-all solutions to the problem of attending to your investments. These approaches are usually delusions. As I try to make clear in the following pages, no investment strategy will provide stability forever. You will have to be nimble enough to see major trends coming and make changes accordingly. What follows is a good guide, I think, but it is only a guide.
The main goal of investing in a crash environment is safety. When deflation looms, almost every investment category becomes associated with immense risks. Most investors have no idea of these risks and will think you are a fool for taking precautions.
Many readers will object to taking certain prudent actions because of the presumed cost. For example: “I can’t take a profit; I’ll have to pay taxes!” My reply is, if you don’t want to pay taxes, well, you’ll get your wish; your profit will turn into a loss, and you won’t have to pay any taxes. Or they say, “I can’t sell my stocks for cash; interest rates are only 2 percent!” My reply is, if you can’t abide a 2 percent annual gain, well, you’ll get your wish there, too; you’ll have a 30 percent annual loss instead. Others say, “I can’t cash out my retirement plan; there’s a penalty!” I reply, take your money out before there is none to get. Then there is the venerable, “I can’t sell now; I’d be taking a loss!” I say no, you are recovering some capital that you can put to better use. My advice always is, make the right move, and the costs will take care of themselves.
If you are preoccupied with pedestrian concerns or blithely going along with mainstream opinions, you need to wake up now, while there is still time, and actively take charge of your personal finances. First you must make your capital, your person and your family safe. Then you can explore options for making money during the crash and especially after it’s over.
As the subtitle implies, this book is designed as a guide for arranging your finances prior to any future deflationary depression, whether one occurs now, as I expect, or not. Although I want this book to have value beyond the present situation, some of the specifics of my suggestions are time-sensitive by nature. If you need to know today where you can find the few exceptionally sound banks, insurers and other essential service providers, if you want to locate the safest structures in the world for storing your wealth, whether in paper monetary instruments or physical assets such as precious metals, you will find the answers in these chapters. Yet over time, the best institutions and services today might be long gone, and others may have taken their place. For a few years at least, we will post free updates to this information at www.conquerthecrash.com/readerspage. But if you read this book 50 years from now, you may have to do your own research to fit the investment options and service providers available at the time. Nevertheless, the general nature of your goals should be much as outlined herein.
Most people do not have the foggiest idea how to prepare their investments for a deflationary crash and depression, so the techniques are almost like secrets today. The following chapters show you a few steps that will make your finances secure despite almost anything that such an environment can throw at them.
8 Chapters of Conquer the Crash — FREE!
This free, 42-page report can help you prepare for your financial future. You’ll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more.
Markets Aren’t Rational EWI’s Brian Whitmer shows how the European financial markets move despite the news November 29, 2011
By Elliott Wave International
As the news from Europe about bailouts and the euro’s viability changes by the hour, EWI’s European editor, Brian Whitmer, doesn’t see the uncertainty as a problem. In fact, he points out that when uncertainty blooms, you can really see that markets aren’t rational and that Elliott waves tend to become even clearer. He discusses the “uncertainty in Europe” in this excerpt from the November European Financial Forecast:
Markets Aren’t Rational
How many times did analysts blame the summer sell-off on “uncertainty in Europe”? But as stocks rallied over the past two months, notice that the European situation became more uncertain, not less, as the headlines in this chart attest. Who would have guessed that stocks could jump 30% amidst such uncertainty?
Likewise, the financial press uniformly attributed last Thursday’s [Oct. 27, 2011] 5% upward spike to reports that EU leaders had reached “broad agreement” on a path forward. But, here, too, uncertainty, not accord, prevailed that day. “Most details remain,” said an economic consultant quoted in the Financial Times. “We have a few more weeks of uncertainty to digest,” added a bank executive with Royal Bank of Canada. Much of what is needed “has not yet been finalized,” concluded the FT. The most important item of news that day was that Greece’s bondholders would take a 50% haircut. But even here, the plan was either short on details, under discussion, or otherwise unclear, according to news reports. As stocks fall again, the press will cite all these reasons and more to rationalize the decline.
The European Debt Crisis is affecting investments across the globe. Elliott Wave International’s analysts have been anticipating and tracking the credit crisis across the European nations, alerting subscribers to the impact it could have on their investments. This free report offers commentary from February 2010 through November 2011 that will help you to better understand what could be in store in the coming months and years.
What is the real problem with today’s market? Watch this excerpt from Robert Prechter’s special, video issue of the August 2011 Elliott Wave Theorist. Prechter shows you how the buildup of dollar-denominated debt has brought us to what he calls a critical market juncture.
Get even more information about current market trends and how to prepare for what’s ahead with our new 14-page investing report. See details below.
The Most Important Investment Report You’ll Read for 2012Every year or two Elliott Wave International (EWI) publishes analysis with a message so critical that they decide to share it, FREE.They have just released The Most Important Investment Report You’ll Read for 2012, a free report to help you navigate the markets and prepare for what’s ahead. You’ll get hard facts, 25 eye-opening charts and 14 pages of straightforward commentary that will put the volatile market action of the past months into perspective within the “big picture” to help you position for the years to come.
In an interview with the Mind of Money, Robert Prechter stresses the importance of keeping your money safe in this bear market environment. According to the Elliott wave model, we have entered a critical phase in the market. This 3-minute video clip will help you to prepare for what’s ahead.
Every year or two Elliott Wave International (EWI) publishes analysis with a message so critical that they decide to share it, FREE.
They have just released The Most Important Investment Report You’ll Read for 2012, a free report to help you navigate the markets and prepare for what’s ahead. You’ll get hard facts, 25 eye-opening charts and 14 pages of straightforward commentary that will put the volatile market action of the past months into perspective within the “big picture” to help you position for the years to come.
Many people still talk about a “recovery,” or at worst only see a possible double-dip recession. But what if the mistake was to think the economy was only in a recession in the first place? It can’t “double-dip” when it never truly recovered:
“The respite following the 2009 stock market low is not a new expansion. It has failed to improve housing sales, barely caused employment to budge, and hasn’t managed — despite the unprecedented manufacture of new Fed money — to get the total supply of credit back above its 2008 high.”
Elliott Wave Theorist, Sept. 2011
Indeed, the Federal Reserve’s quantitative easing measures have failed.
The Fed’s latest policy plan to stimulate the economy has been dubbed “Operation Twist.”
“On September 30, the Fed started operation twist, by which it will sell its holdings of short-term Treasuries and use the proceeds to buy longer-dated T-bonds. The goal is to foster more credit by lowering long-term borrowing costs. But last month [we] noted that low rates compound the money-making problem for banks by reducing margins. ‘Historical verification of this development is obvious from Japan,’ says a recent report from Hoisington Investment Management. ‘Normal bank lending functions are essentially shut down. This risk now confronts the U.S.’ The problem is not the cost of credit; it’s demand, which is waning. Lower rates will have little effect in helping foster enough expansion to allow the mountain of total credit-market debt built up over the last 70 years to be repaid, or even serviced.”
Elliott Wave Financial Forecast, November 2011
Imagine if the newspapers reported that Bernanke appeared before Congress and said this:
“‘This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever.’”
Bernanke did not say that, but his counterpart in Britain did. As reported by The Telegraph (Oct. 6), the comment came from Sir Mervyn King, the Governor of the Bank of England.
The Fed is unable to stimulate the economy, the unemployment rate is not improving, and housing is in a “triple-dip” in some areas of the country. What does this mean for the markets and your investments in 2012?
Elliott Wave International just released a free report to help you navigate the markets and prepare for what’s ahead. You’ll get hard facts, 25 eye-opening charts and 14 pages of straightforward commentary that will put the volatile market action of the past months into perspective within the “big picture” to help you position for the years to come.
How to Find Correct Elliott Wave Patterns in Market Charts
(Note: This video was originally recorded on August 10, 2007) In this timeless trading lesson on Elliott wave analysis, Elliott Wave International’s Senior Currency Analyst Jim Martens gives you an answer to a very important question: “If you’ve identified the wrong Elliott Wave pattern, how do you find the right one?”
Suppose you see a lovely house — one with great curb appeal. It has new paint and manicured shrubbery out front.
But also suppose that you look more closely. You press your thumb on the window sill and the wood frame crumbles in. Come to find out, the wood is rotten in too many places to count. The deck joists and supports are fractured. Even the terrain underneath the deck looks unstable. And the closer you look the worse the problems are.
It’s obvious that very few people would buy that house. Yet you can be pretty sure that the home’s owner will have “good things” to say about the place.
Likewise, today’s stock market has plenty of cheerleaders — even as the rot spreads throughout the economy. Real estate and homebuilding sector alike continue to decline in the wake of the mortgage meltdown. Municipalities continue to have growing budget problems. We’re not talking about a “small town” bankruptcy, either. An Oct. 12 Reuters headline reads:
“Harrisburg, Pa., Files for Bankruptcy Protection.” The story goes on to say that “The Pennsylvania state capital faces a $300 million debt crises…”
This Oct. 12 headline is from Bloomberg: “California Kids Face Days Without School as Revenue Gap Imperils Education.” It continues: “Public schools in California…are bracing for a $1.7 billion cut that may wipe out high-school sports and student busing, and trim the academic calendar by seven days next year.”
The economic problems run much deeper and wider than these stories can reflect — yet they are indeed today’s stories. The capital of one of our biggest states is filing for bankruptcy? That should serve as an alarm. Then again, the market is rallying just weeks after the downgrade of U.S. Treasury debt.
So when will optimistic financial investors wake-up to reality?
“At some point in the trend toward negative social mood, fear, and then panic, will bring to light the risks that people today are ignoring. Global credit deterioration is objectively real; but disaster will strike only when it becomes subjectively realized.” Elliott Wave Theorist, September 2011
Collective psychology could “catch up” to the objective economic reality sooner than later.
Will you be prepared when the economic reality hits?
Robert Prechter has just released a FREE report — with urgent analysis from his August and September 2011 Elliott Wave Theorist letters, including an excerpt from a special video presentation that he created for his subscribers in August.
Stocks — Buying Opportunity or Another “Free Fall” Ahead? will help you put these uncertain markets into perspective so that you’ll be better positioned to both protect your investments when needed and prosper when opportunities arise.
What Personality Type Makes the Best Trader? EWI’s Jeffrey Kennedy shows you how your psychological strengths and weaknesses determine your ability to “live long and prosper” in fast-moving markets September 21, 2011
By Elliott Wave International
Do your decisions rely on data, or do you go with your gut?
Think about your most recent auto purchase. Was it based on meticulous consumer research or did you go with a model that “felt right”?
How about the last time you had to assemble something? Did you read the manual first or just figure it out as you went?
What about your most recent successful stock market trade?
Consistent trading success demands independent thinking and emotional discipline.
I just cannot stress enough how you have to manage your emotions whenever you’re on [a] position.
Field dependence can sabotage you unknowingly when you’re trading, because you’ll see a trade signal, the trade will be there, but “it just won’t feel right.”
[It's] one of those things that can sabotage us if we’re not aware of it, or, more importantly, [don't] have a well-defined methodology and the discipline to follow it.
In footage from his trading course in Las Vegas, he goes on to discuss the psychological profile that makes “the best trader:”
What Personality Type Makes the Best Trader?
EWI’s Jeffrey Kennedy shows you how your psychological strengths and weaknesses determine your ability to “live long and prosper” in fast-moving markets
September 21, 2011
By Elliott Wave International
Do your decisions rely on data, or do you go with your gut?
Think about your most recent auto purchase. Was it based on meticulous consumer research or did you go with a model that “felt right”?
How about the last time you had to assemble something? Did you read the manual first or just figure it out as you went?
What about your most recent successful stock market trade?
Consistent trading success demands independent thinking and emotional discipline.
I just cannot stress enough how you have to manage your emotions whenever you’re on [a] position.
Field dependence can sabotage you unknowingly when you’re trading, because you’ll see a trade signal, the trade will be there, but “it just won’t feel right.”
[It's] one of those things that can sabotage us if we’re not aware of it, or, more importantly, [don't] have a well-defined methodology and the discipline to follow it.
In footage from his trading course in Las Vegas, he goes on to discuss the psychological profile that makes “the best trader:”
Learn more about managing your emotions, developing your trading methodology, and the importance of discipline in your trading decisions in The Best of Trader’s Classroom, a FREE 45-page eBook from Elliott Wave International.
Since 1999, Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. Now you can get “the best of the best” in these 14 lessons that offer the most critical information every trader should know.
Find out why traders fail, the three phases of a trader’s education, and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more!
Don’t miss your chance to improve your trading. Download your FREE eBook today!
Learn more about managing your emotions, developing your trading methodology, and the importance of discipline in your trading decisions in The Best of Trader’s Classroom, a FREE 45-page eBook from Elliott Wave International.
Since 1999, Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. Now you can get “the best of the best” in these 14 lessons that offer the most critical information every trader should know.
Find out why traders fail, the three phases of a trader’s education, and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more!
Trading using technical indicators — such as the MACD, for example, Moving Average Convergence-Divergence — can do one of two things: help you or hinder you.
Using them as a forecasting method alone can be about as predictable as flipping a coin. But when you combine them with other forms of technical analysis (i.e. the Wave Principle), the same MACD can be your new best friend.
Technical indicators are meant to do exactly what the name implies: “indicate” that a buy or sell signal may be in place. (Don’t confuse “indicate” with “guarantee”: They are not called “technical guarantors” for a reason.)
Elliott Wave International’s Futures Junctures editor Jeffrey Kennedy shows you how he uses technical indicators to his advantage in his FREE eBook, The Commodity Trader’s Classroom:
“Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups.”
Jeffrey goes on to describe his favorite indicator, the MACD:
“Out of the hundreds of technical indicators I have worked with over the years, my favorite study is the MACD [which] uses two exponential moving averages (12-period and 26-period). The difference between these two moving averages is the MACD line. The trigger or Signal line is a 9-period exponential moving average of the MACD line.”
Figure 10-1 gives you an example of the MACD indicator in Coffee futures.
One of the signals of a potential trade setup that the MACD often introduces is what Jeffrey refers to as the Hook. Here’s another quote from the free eBook:
“A Hook occurs when the MACD line penetrates, or attempts to penetrate, the Signal line and then reverses at the last moment. In addition to identifying potential trade setups, you can also use Hooks as confirmation. Rather than entering a position on a cross-over between the MACD line and Signal line, wait for a Hook to occur to provide confirmation that a trend change has indeed occurred. Doing so increases your confidence in the signal, because now you have two pieces of information in agreement.”
Figure 10-4 gives you an example of the Hook at work in live cattle futures.
“A Hook should really just be a big red flag, saying that the larger trend may be ready to resume. It’s not a trading system that I follow blindly. All I’m looking for is a heads-up that the larger trend is possibly resuming.”
Learn more about other technical indicators that you can use to your advantage, as well as the other important lessons in theFREE 32-page eBook, The Commodity Trader’s Classroom. It is filled with actionable lessons you can apply to your trading strategy. Download it right now, instantly, when you create your free Club EWI profile.
When Ralph Nelson Elliott discovered the Wave Principle nearly 70 years ago, he explained how social (or crowd) behavior trends and reverses in recognizable patterns. You can learn to identify these patterns as they unfold in the financial markets, and use them to help anticipate where prices will go next. Elliott Wave International has developed a free comprehensive online course – The Elliott Wave Tutorial: 10 Lessons on the Wave Principle – which describes these patterns and explains how they relate to one another.
To use the Wave Principle as you analyze the markets, you need a basic understanding of the Elliott method — the rules and guidelines, the literal shape of individual waves, even when the larger trend may turn.
To get you started, we’ve included an excerpt from the free Elliott Wave Tutorial, adapted from Elliott Wave Principle by Frost and Prechter, and a short video clip from the live presentation, Tips from a Pro.
__________________________
Here is your quick lesson excerpted from The Elliott Wave Tutorial:
In his 1938 book, The Wave Principle, and again in a series of articles published in 1939 by Financial World magazine, R.N. Elliott pointed out that the stock market unfolds according to a basic rhythm or pattern of five waves up and three waves down to form a complete cycle of eight waves. The pattern of five waves up followed by three waves down is depicted in Figure 1-2.
One complete cycle consisting of eight waves, then, is made up of two distinct phases, the motive phase (also called a “five”), whose subwaves are denoted by numbers, and the corrective phase (also called a “three”), whose subwaves are denoted by letters. The sequence a, b, c corrects the sequence 1, 2, 3, 4, 5 in Figure 1-2.
At the terminus of the eight-wave cycle shown in Figure 1-2 begins a second similar cycle of five upward waves followed by three downward waves. A third advance then develops, also consisting of five waves up. This third advance completes a five wave movement of one degree larger than the waves of which it is composed. The result is as shown in Figure 1-3 up to the peak labeled (5).
At the peak of wave (5) begins a down movement of correspondingly larger degree, composed once again of three waves. These three larger waves down “correct” the entire movement of five larger waves up. The result is another complete, yet larger, cycle, as shown in Figure 1-3. As Figure 1-3 illustrates, then, each same-direction component of a motive wave, and each full-cycle component (i.e., waves 1 + 2, or waves 3 + 4) of a cycle, is a smaller version of itself.
Every wave serves one of two functions: action or reaction. Specifically, a wave may either advance the cause of the wave of one larger degree or interrupt it. The function of a wave is determined by its relative direction. An actionary or trend wave is any wave that trends in the same direction as the wave of one larger degree of which it is a part. A reactionary orcountertrend wave is any wave that trends in the direction opposite to that of the wave of one larger degree of which it is part. Actionary waves are labeled with odd numbers and letters. Reactionary waves are labeled with even numbers and letters.
Watch this video clip from Tips from a Pro for more on Elliott waves:
EWI’s Chief Currency Strategist Jim Martens explains how learning to use Elliott waves can be as simple as counting to 5 and knowing your A-B-Cs.
Learn about the Elliott Wave Principle and how applying it to your market analysis can improve your investing and trading. Take the entire online course – The Elliott Wave Tutorial: 10 Lessons on the Wave Principle – FREE!Click here to access the 10 Lessons.
If the word ‘fractal’ comes up at all in conversation, that conversation is probably being held in a mathematics department. However, anyone who is interested in the Wave Principle and how it applies to the stock market may have stumbled across the phrase “robust fractal.” If you want to know more about what it means in that context, here’s an excerpt from Elliott Wave International’s primer on fractals that explains the connection.
In the 1930s, Ralph Nelson Elliott discovered that aggregate stock market prices trend and reverse in recognizable patterns. In a series of books and articles published from 1938 to 1946, he described the stock market as a fractal. A fractal is an object that is similarly shaped at different scales.
Although Elliott came to his conclusions fifty years before the new science of fractals blossomed, he took a step that current observers of natural processes have yet to take. He explained not only that the progress of the market was fractal in nature but discovered and described the component patterns. The patterns that Elliott discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated and defined a number of patterns, or “waves,” that recur in market price data. He named and illustrated the patterns. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns at the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle….
The Stock Market as a Robust Fractal
A classic example of a self-identical fractal is nested squares. One square is surrounded by eight squares of the same size, which forms a larger square, which is surrounded by eight squares of that larger size, and so on.
A classic example of an indefinite fractal is the line that delineates a seacoast. When viewed from space, a seacoast has a certain irregularity of contour. If we were to drop to ten miles above the earth, we would see only a portion of the seacoast, but the irregularity of contour of that portion would resemble that of the whole. From a hundred feet up in a balloon, the same thing would be true.
Scientists today recognize financial markets’ price records as fractals, but they presume them to be of the indefinite variety. Elliott undertook a meticulous investigation of financial market behavior and found something different. He described the record of stock market prices as aspecifically patterned fractal yet with variations in its quantitative expression. I call this type of fractal, which has properties of both self-identical and indefinite fractals, a robust fractal. Robust fractals permeate life forms. Trees, for example, are branching robust fractals, as are animals, circulatory systems, bronchial systems and nervous systems. The stock market record belongs in the category of life forms since it is a product of human social interaction.
How Is the Stock Market Patterned?
Figure 1 shows Elliott’s idea of how the stock market is patterned. If you study this depiction, you will see that each component, or “wave,” within the overall structure subdivides in a specific way by one simple rule: If the wave is heading in the same direction as the wave of one larger degree, then it subdivides into five waves. If the wave is heading in the opposite direction as the wave of one larger degree, then it subdivides into three waves (or a variation). These are called motive and corrective waves, respectively. Each of these waves adheres to specific traits and tendencies of construction, as described in Elliott Wave Principle (1978).
Waves subdivide this way down to the smallest observable scale, and the entire process continues to develop larger and larger waves as time progresses. Each wave’s degree may be identified numerically by relative size on a sort of social Richter scale.
Want to Know More About Fractals and the Stock Market? Then read the whole special report, called “The Human Social Experience Forms a Fractal.” It’s free of charge, so long as you are a member of Club EWI, which gives you access to many free reports that explain Elliott wave analysis and the Wave Principle.
Below is an excerpt from the newest free Club EWI investor education resource, The Independent Investor eBook 2011. Inside are some of the most eye-opening research findings by EWI’s president Robert Prechter, as published in the recent issues of his monthly Elliott Wave Theorist.
Enjoy this short excerpt — and for details on how to read this eBook in full, free, look below.
Club EWI’s Free Independent Investor eBook 2011 (excerpt) Chapter 1: Quantitative Easing Has Not Brought Back the Old Inflationary Trend
(From Prechter’s January 2011 Elliott Wave Theorist)
While long terms rates are rising, Treasury bill rates are stuck near zero. How is it possible?
… During hyperinflation, rates typically rise to double digits per month. Inflationists find it difficult to reconcile the Fed’s massive balance sheet growth over three years beginning in August 2008 with short term rates at zero and long term rates only in the 2-5% range.
Deflationists (all ten of us) understand why investors are willing to hold government paper at such low returns: The total supply of debt is contracting. Most bonds won’t survive. The federal government’s bonds will survive the longest.
Figure 10 shows that the total supply of “money” plus debt (all of which is in fact debt) peaked in 2008. This decline in overall money and credit is the first on an annual basis since 1929-1933. It is a big deal.
… This graph explains why gold in 2010 was so much lonelier in making an all-time high than stocks, commodities and real estate were in 2006, when everything was making an all-time high simultaneously: The total money + credit supply is down and cannot support new highs in all markets at once.
The Fed’s QE programs are failing to re-ignite inflation. By mid-2011, the Fed will have monetized just over $2 trillion worth of debt since 2008 to bring the value of its total assets to about $3t. This does represent a huge amount of fiat money. But the overall debt load is $65 trillion. Thus, the Fed will have monetized only 5% of the total, meaning that 95% of the outstanding debt is still suffocating the economy like a giant pool of sludge. …The Fed’s degree of monetization in light of these debts is very small.
For more of Robert Prechter’s insights on the markets, including why QE2 was a major tactical error, why rising oil prices are not bearish for stock, and why earnings don’t drive stock prices, read the rest of this FREE 51-page Independent Investor eBook. Download your free eBook NOW.
What advantages does the Wave Principle offer to traders?
Here’s one of the big advantages of using the Wave Principle when trading: you can increase your understanding of how current price action relates to the market’s larger trend.
Other tools fall short in this regard. Several trend-following indicators such as oscillators and sentiment measures have their strong points, yet they generally fail to reveal the maturity of a trend. Moreover, these technical approaches to trading are not as useful in establishing price targets as the Wave Principle.
Here’s another big advantage of using the Wave Principle in your trading, which comes directly from the free eBook “How the Wave Principle Can Improve Your Trading” -
“Technical studies can pick out many trading opportunities, but the Wave Principle helps traders discern which ones have the highest probability of being successful.”
Indeed, this valuable free eBook shows you how to identify and exploit the market’s price pattern, as shown in the Elliott wave structure below:
The Wave Principle also helps you to identify price levels where you may want to place protective stops.
“…although the Wave Principle is highly regarded as an analytical tool, many traders abandon it when they trade in real-time — mainly because they don’t think it provides the defined rules and guidelines of a typical trading system.
But not so fast — although the Wave Principle isn’t a trading “system,” its built-in rules do show you where to place protective stops in real-time trading.” “How the Wave Principle Can Improve Your Trading”
Before you attempt to identify price levels for protective or trailing stops, you should first become familiar with these three rules of the Wave Principle:
Wave 2 can never retrace more than 100 percent of wave 1
Wave 4 may never end in the price territory of wave 1
Wave 3 may never be the shortest impulse wave of waves 1, 3, and 5
Technical analysis of financial markets does not have to be complicated. Here are EWI, our main focus is on Elliott wave patterns in market charts, but we also employ other tools — like trendlines.
A trendline is a line on a chart that connects two points. Simple? Yes. Effective? You be the judge — once you read the free 14-page Club EWI report by EWI’s Chief Commodity Analyst and Senior Tutorial Instructor Jeffrey Kennedy.
Enjoy this free excerpt — and for details on how to read this report in full, free, look below.
Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions (Free Club EWI report, excerpt)
Chapter 1
Defining Trendlines
Before I define a trendline, we need to identify what a line is. A line simply connects two points, a first point and a second point. Within the scope of technical analysis, these points are typically price highs or price lows. The significance of the trendline is directionally proportional to the importance of point one and point two. Keep that in mind when drawing trendlines.
A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic, as it was in the upwards sloping line in Figure 1-1 or extremely pessimistic, as it was in the downwards sloping line in the same figure.
You can draw them horizontally, which identifies resistance and support. Or, you can draw them vertically, which identifies moments in time. You primarily apply vertical trendlines if you’re doing a cycle analysis.
Chapter 2
Drawing Trendlines
In this section, I’ll show you how I draw trendlines. I’ll start with the most common, simple way to draw them…
As gold climbed to its December 2010 all-time high above $1,430 an ounce, virtually everyone believed it would only go higher. Sentiment readings in metals were extreme for much of 2010; they grew more extreme near the peak. As the January 2011 Elliott Wave Financial Forecast reported,
“Several weeks ago, [the net position of large speculators] pushed to an all-time record high, as hedge funds [also] became fully committed to gold’s rise.”
Market observers commonly offered the following reasons for gold’s rally:
Quantitative easing in the U.S. and Europe made investors fearful that all that “money printing” would devalue currencies
Investors worried that Europe’s sovereign debt crisis may spread
Fear of inflation was fuel to the fire
Well, here we are, a month-and-a-half later. “Madman Bernanke” is still at it. Europe’s debt crisis remains fundamentally unresolved. Inflationists are still waiting for a Zimbabwe-like collapse.
Yet this week, gold has fallen as low as $1,338 an ounce. So the question is:
Why is gold falling when the same fundamental reasons that made everyone buy it last month are no different this month?
Mainstream analysts can reply with a dozen “reasons.” Yes, they say, quantitative easing continues, but it’s designed to strengthen the economy — maybe it’s “not all bad.” Yes, Europe is still in trouble, but “they are working on it.” Yes, inflation is coming, but “it’s not here yet.”
Do you know the word for this? It’s rationalization. In 2010, people who felt bullish about gold rationalized their bullishness by focusing on the supposedly bullish factors. When the same factors seem less bullish today, the same people rationalize why they aren’t.
Emotional bias is as old as investing itself. Consider what Bob Prechter said in his December 2010 Elliott Wave Theorist:
On Sunday, December 5, I was in Dallas speaking to a group of savvy money managers… Several of them were keenly aware of the role of market psychology in markets. Still, the only investment comment I received, unsolicited, was “There is only one market I know is going up: silver.” It came from a seasoned, successful investor… I asked what his reasons were, and he mentioned that silver mostly comes as a byproduct of other mining (true), that there are new uses for silver invented every year (true), and that much industrial silver is used up and not recovered (true).
I mentioned that I already knew these things because I read about them 30 years ago, around the time silver topped at $50/oz. Jerome Smith’s book, Silver Profits in the 80′s, cited the following “four primary causes” for a renewed silver boom:
“…electronics industry has exploded [and so] has the…use of silver”
“While demands for silver are soaring, market supplies are declining…”
“Silver production has been far less than consumption…”
“[T]he U.S. Treasury…sold [silver] to fill the gap between production and consumption…in the 1960s and the 1970s. Now it is virtually gone.”
Every one of these statements was — and still is — correct. If markets followed the rules of mechanics, silver would have risen to the moon for the stated reasons. But silver had already peaked at $50/oz. two years prior to the book’s publication. To this day, it has not matched its peak price of 30 years ago. Yet the bullish fundamentals…have remained in place the whole time.
Which brings us to gold’s more than 6% decline (so far) off its December all-time high. Psychology plays an enormous role in market trends. Investor mood — bullish or bearish — sweeps nearly everyone off their feet. They will grasp at every fundamental reason to justify their bullish or bearish conviction.
And when the mood changes and the scales fall away, the “reasons” are still there — but the world suddenly looks very different.
Market charts reflect these psychological extremes in the form of Elliott wave patterns. This makes markets predictable, within a range of probabilities. Read our latest gold and silver Elliott wave analysis today in The Financial Forecast Service, including a specific, actionable forecast for the metals in Bob Prechter’s latest Elliott Wave Theorist, risk-free. Follow this link to learn more.
The following trading lesson has been adapted from Jeffrey
Kennedy’s eBook, Trading the Line – 5 Ways You Can
Use Trendlines to Improve Your Trading Decisions. Now through
February 7, you can download the 14-page eBook free. Learn
more here.
“How to draw a trendline” is one of the first things
people learn when they study technical analysis. Typically,
they quickly move on to more advanced topics and too often
discard this simplest of all technical tools.
Yet you’d be amazed at the value a simple line can offer
when you analyze a market. As Jeffrey Kennedy, Elliott Wave
International’s Chief Commodity Analyst, puts it:
“A trendline represents the psychology of the market,
specifically, the psychology between the bulls and the bears.
If the trendline slopes upward, the bulls are in control.
If the trendline slopes downward, the bears are in control.
Moreover, the actual angle or slope of a trendline can determine
whether or not the market is extremely optimistic or extremely
pessimistic.”
In other words, a trendline can help you identify the market’s
trend. Consider this example in the price chart of Google.
That one trendline — drawn between the lows in 2004 and the
lows in 2005 — provided support for a number of retracements
over the next two years.
That’s pretty basic. But there are many more ways to
draw trendlines. When a market is in a correction, you can
draw a trendline and then draw a parallel line: in turn, these
two parallel lines can create a channel that often “contains” the
corrective price action. When price breaks out of this channel,
there’s a good chance the correction is over and the
main trend has resumed. Here’s an example in a chart
of Soybeans. Notice how the upper trendline provided support
for the subsequent move.
For more free trading lessons on trendlines, download Jeffrey
Kennedy’s free 14-page eBook, Trading the Line – 5
Ways You Can Use Trendlines to Improve Your Trading Decisions.
It explains the power of simple trendlines, how to draw them,
and how to determine when the trend has actually changed. Download
your free eBook.
Since the time of buttonwood trees, Wall Street has had its own version of the Ten Commandments — the cornerstone principles of conventional economic wisdom. The first of these writ-in-stone notions is the widespread belief that earningsdrivethe stock market.
By this line of reasoning, knowing where a market’s prices will trend next is simply a matter of knowing how the companies that comprise said market are expected to perform. On this, the recent news items below capture the public’s devoted following of earnings data:
“Stocks Rebound As Investors Await Earnings.” (Associated Press)
“US Stocks Drop As Earnings Data Fall Short” (MarketWatch)
“Sideways Market Looks For Direction: Earnings Could Point The Way” (MarketWatch)
In reality, though, much of this belief is based on faith, not facts. While earnings may play a role in the price of an individual stock, the stock market as a whole marches to a different drummer.
You get this ground-breaking revelation in the FREE report from Club Elliott Wave International (Club EWI, for short) titled “Market Myths Exposed.” In Chapter One, our editors shatter the smoke-screen surrounding the widespread notion that “Earnings Drive Stock Prices” with these enlightening insights:
“Quarterly earnings reports announce a company’s achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes.”
And — There is no consistent correlation between upbeat earnings and an uptrend in stock prices; or vice a versa, downbeat earnings and a decline in stocks. Case in point: During the 1973-4 bear market, the S&P 500 plummeted 50% while S&P earnings rose every quarter over that period. Here,“Market Myths Exposed” provides the following, visual reinforcement: A chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998.
As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded the March 2009 bottom in stocks.
“Market Myths Exposed” dispels the top TEN fallacies of mainstream economic thought. The misconception that “Earnings Drive the Stock Market” is number one. The remaining nine are equally capable of knocking your socks off and most importantly, helping you protect your financial future.
Get the 33-page Market Myths Exposed eBook for FREE Learn why you should think independently rather than relying on misleading investment commentary and advice that passes as common wisdom. Just like the myth that government intervention can stop a stock market crash, Market Myths Exposed uncovers other important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, inflation and deflation, and more! Protect your financial future and change the way you view your investments forever! Learn more, and get your free eBook here.
Will you be prepared when the economic reality hits?
