Thursday, March 8, 2012

Elliot Wave Principle Book Review

Elliot Wave Principle Book Review

I recently completed reading an interesting technical analysis book entitled "Elliot Wave Principle" by a man named Robert Prechter, president of Elliot Wave International, and found it to be worth reviewing. Though I got the hardback for myself you can actually get a complimentary copy in ebook form. I just can't read ebooks of any substantial length myself.

This book is a must for anyone who believes that there is method to the stock Market Madness.

The wikipedia entry for "Elliot Wave Principle" states that it is "a form of technical analysis that investors use to forecast trends in the financial markets and other collective activities.”

Elliot Wave Theory was developed by a man named Ralph Nelson Elliot in the 1930's and refined through the 40's that attempts to use recurring past price patterns to predict future prices (the basis of all technical analysis).  Elliot found that market prices form repeated waves, on any time scale one cared to look at, no matter how small or how large (the concept of fractals can be useful here). And he found that these waves come in basic patterns.

Elliot believed that these waves consistently come in a 5-wave pattern in the direction of the "parent" (main) trend, followed by a 3-wave pattern against that trend. In the 5-wave pattern (called the "Motive" phase) you would have waves 1,3, and 5 following the main trend and waves 2 and 4 acting as "correction" waves.
Then we come to the 3-wave pattern, going against the main trend, in which it is waves 1 and 3 that are the "corrective" waves and wave 2 is a "distraction" wave. The above described process constitutes one complete cycle (for a given scale).

Is this making any sense to you? Probably not and I know it really didn't for me. Which is why I ended up buying the book for myself. While not overly complex (anyone can understand and do it) it is also not a simple method of analysis and is best explained by the experts. Of which I am most certainly not one which is why I do recommend this book for anyone curious about Elliot Wave Analysis.

It is not a book about day-trading or a book full of promises that you can get rich quick trading. You will be sorely disappointed if that is what you're after, which you shouldn't be anyway. It is a book about mass social psychology, market behavior, and market history. And about how these things can work for you if you understand them. What it is is an interesting and very worthwhile book that will add to your market understanding and, if applied properly, help you be more profitable in your trading or investing. You've probably heard of Fibonacci mathematics and may even use them to some degree in your technical analysis. Well, this book is full of Fibonacci mathematics concepts (don't worry, you won't be doing any advanced maths yourself) and that content alone makes the book worth the read.

Prechter's book attempts to teach you how to spot the Elliot wave patterns, and therefore be able to predict more accurately where the market (or single stock issue) might go next based on where it currently is in the cycle. Prechter's Elliot Wave Principle does an admirable job of imparting to readers all they need to know to get started right away incorporating basic, and advanced wave analysis into their trading arsenal. Elliot Wave Analysis has a large following of technical analysts all over the world and has stood the test of time for over 70 years

Prechter has made some epic calls over the years but he has also taken a lot of heat lately over his calls over the last couple years for a coming "deflationary depression."
The fact of the matter is though that it is much much too early to call him wrong at this point (though I myself am not in the deflation camp).

We think it's definitely worth a read. Especially for free.

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