The practical application of Elliott Wave methods are sometimes lost on new traders even though professionals use them all the time. Some traders find the effort spent to understand them can be very worth while. Some people find that the theory can give insights that are not available else where.
R. N. Elliot (1871–1948) was a financial mastermind. His financial genius is reflected in his formulation of the Elliot wave theory, which is still being used successfully, 75 years from the time of its inception (1934). Elliot opted for the accounting profession when he was 25 years old, and then for the next 25 years, he occupied top financial positions in railroad companies in Mexico and Central America. During his stints, he rescued many companies from the brink of financial crises, earning himself the reputation of an expert business planner and organizer.
In the year 1920, Elliot moved to New York and his reputation and expertise got him a top accountant position in a U.S. Government’s International project. Then in 1924, he was chosen as Chief Accountant of Nicaragua, which was then controlled by U.S. Marines. In early-1925, Elliot applied his expertise and experience in managing and restructuring the finances of Nicaragua – an entire country!
Eventually, Elliot moved into a hotel in Brooklyn, which was a stone’s throw away from Manhattan’s financial hub. In 1939, Elliot was contracted by the magazine Financial World to write a series of articles around his Wave theory. These articles further cemented Elliot’s rock-solid reputation with investors and fund managers.
In 1926, Elliot moved to Guatemala – and became General Auditor of Central America’s International railway division. While serving as general auditor, Elliot authored 2 books – “Tea Room and Cafeteria Management” (which was published) and “The Future of Latin America”. Around 1926–1927, Elliot decided to return to America to set up his own management consulting practice. This was also the time when tragedy reared its ugly head.
He suffered from the symptoms of an alimentary canal illness, which he had picked up from his Central American stint. His reputation was on the rise – his book was selling well, his background and references were the talk of the town, and he was an always-in-demand speaker, and his practice was booming. In the best of times came the worst of news – Elliot was diagnosed with pernicious anemia, a debilitating medical condition, and became bedridden at a relatively young age of 58.
By early 1940, Elliot had firmly established his theory that human emotions and actions were based on a natural progression method. He reconciled human behavior with the “golden ratio”, also known as the Fibonacci ratio.
The dominant trend waves are labeled as 1, 2, 3, 4, 5, while the reactive phase waves are labeled as A, B, C. Of the 5 waves within the dominant trend, three moving in the direction of the trend (1, 3, 5) are referred to as impulse or motive waves and two moving against the trend (2, 4) as corrective waves. Similarly, the corrective phase is comprised of one impulse wave (B) and two corrective waves (A, C).
By applying fractal mathematics to price movements in the market, Elliott developed his wave theory to make market predictions based on collective crowd behavior.
Elliot passed away in 1948, but his brilliant formulation – The Wave principle or The Elliot wave Theory – continues to produce amazingly accurate results till this day, rewarding the faithful in the process.
