Faces of Waves Illustrated [1] Team of six (and their siblings)

This is the first article of my new series Faces of Waves Illustrated.

When you open the currency section of morning news papers, you always find it says how MUCH Euro appreciated (or declined) against US dollar the day before. (If Euro or US dollar is not your interest, pick a currency of your interest, if currency is not of your interest pick stock or commodity.)

But you find much less descriptions of HOW Euro reached to the closing price. Did it go straight up? Or it took some ups and downs before reaching to the eventual height? This ups and downs is what we call PRICE ACTION, and the close observation of price actions is the first step to be a profitable trader.

If you plot the price action along the time into a graph, it becomes a CHART that typically looks like this (please ignore the labels I put):

20100106-audjpy-10min

Now you are graphically observing the ups and downs, and started take a baby step to recognize the price action as a SHAPE.

So, I ask you this question: How do you describe the shape in the chart above? It may be difficult to describe it precisely with a word because the price action is not a straight line up. It contains numerous ups and downs and whole thing just looks chaos. But you may say, for all the varying amplitude and frequency, they are all variations of WAVES.

It could be a mind leap for you, but I dare to present you here with a set of very basic wave patterns. Good news. They are only 6 of them (well…to start with).

basic-waves

Those six are divided to two subgroups Motive and Corrective:

  • Motive
    • Impulse
    • Diagonal
  • Corrective
    • Zigzag
    • Flat
    • Triangle
    • Complex

That’s it.

What do you think? Are they too few? Are they too simple?

They do not resemble at all to the real life chart like in the first image?

Yes, yes…I hear you.

But suppose those 6 wave patterns are connected together. They can form much more complex waves, can’t they?

connecting-basic-patterns

I hope you are impressed.

It looks much similar to the real life charts though it may not trace the exact price action.

The recognition of the connected WAVE PATTERNS of the price action in the chart is the heart of Elliott Wave Principle.

Welcome to the world of Elliott Wave Principle!

There is one thing I did not tell you before showing the image of connected waves, and I hope it does not scare you:
Each of those 6 guys has one sibling with the opposite sex.

basic-waves-bear

Right. They are just flipped version of the first group of 6. The waves of the first group are dominantly present when the market is BULLISH (or price is going up), and when the market is BEARISH (or price is going down), you will see more from the second group.

I think I stop here for the first article.

Before the next article please familiarize yourself with the shapes of the basic patterns.

  • How many turning points do they have?
  • What is the difference in price level between the starting and end points? Did they result in the clear advance (or decline) in the price? Or they stayed in the same price range?
  • How are they different in shape to other wave patterns?

What are the names for six wave patterns?

Which subgroup does each of six patterns belong to?

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