CONSERVATIVE TRENDING ANALYSIS VS WAVE ANALYSIS

Elliot came with his wave theory only in the 1940’s. The trending analysis of course is older than that and was the natural logical outcome of general observation. Both are of course trying to predict the timing of market turns.

Both have one thing in common and that is to understand the underlying mass phycology. (herd mentality)

However both methods have a  totally different approach to analysis. It will be prudent to understand first the basic underlying difference between the two.

The trending analysis goes with the flow. If the flow is bullish then the trending analysis will keep giving buy signals. In order to give the sell signal the trending analysis will have to wait for the trend to turn down. The difference between the actual level of turn and the level at which the trending analysis gives the sell signal is sometime very huge to be called a practical approach.

Trending Analysis

There are more than 200 plus indicators in trending analysis. They include both dependent on moving averages and momentum indicators.

Moving averages, as the name suggests  is a mathematically derived line . Common moving averages include 8 day, 14 day, 21 day averages. As long as the markets stay above the moving averages  chosen , it is bullish and below the moving average bearish.

Momentum indicators , rely on rate of increase of the markets. examples are RSI , ROC , stochastics etc. These rely on the premise that in case a market is moving with a good rate in a particular direction, it will continue to do so (for some time at least)

Caution on indicators.

First of all it is not really important to know how to derive  these indicators mathematically. Just as a surgeon need not know how the cutter material is made (he is only interested that during surgery it does its job)  It is suffice to know what the different indicators are meant for and how they have to be used.

Elliot Wave Analysis

The wave analysis unlike the trending analysis , tries to call out the exact points of market turns. From the time of its inception in the forties up till now , it has gone through lot of different interpretations and has subsequently lot of subjectivity built into it. After having gone through almost all worth noticing  interpretations , we also have our own copyrighted ABC wave theory. Together with the equilibrium line theory (again a masswave copyrighted) predictions can be 70- 80 percent correct.

Caution on elliot wave analysis

Newly ordained zealots sometime become completely drowned in the 5 wave up and 3 wave down system. In their zeal they forget that the idea is to make money and NOT BE PROVED RIGHT.

In our belief a system based on following is most practical

  1. Markets at times go up and down in straight lines
  2. Markets do move up in 5 waves and down in 3 waves. However they also move in 3 waves up and 3 waves down
  3. Markets move in channels
  4. Events do not really turn the markets.
  5. Indicators are good to use but only as a support and not as part of the main analysis.
  6. There is no perfect indicator. There is no absolute analysis
  7. Markets necessarily do not follow fundamentals. Herd mentality can make the markets overpriced or underpriced.
  8. Markets have a tendency to follow a equilibrium line. Bollinger bands are based on this.
  9. Markets have patterns which repeat themselves on different time scales. (repetitive patterns of varied size.
  10. In conclusion , an analytical  system is the best which is based on

Indicators, Wave analysis , Understanding patterns, Equilibrium lines.

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