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Intermediate Guide Technical Analysis and the Elliott Wave Theory

Discussion in 'Intermediate Level' started by xyzzy, Aug 28, 2017.

  1. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    Ok cryptoknights, it's time for a brief history lesson that will serve us in becoming greater masters of crypto. Before we get into the history though, let's briefly talk about the school of thought behind chart reading: Technical Analysis.

    Technical vs Fundamental Analysis

    Essentially there exists two main perspectives and schools of thought when it comes to market analysis: the technical analysis and the fundamental analysis. The distinction between the two is important, as each school of thought focuses on separate sets of data.

    Technical analysts are basically chart readers, which you are probably already familiar with. Drawing trend lines, looking for patterns, watching trade volume, etc are all activities of the technical analyst to predict future market outcomes. They mostly stick to the charts because of the belief that the charts hold all relevant market information.

    Fundamental analysts will focus on other financial data such as balance sheets and income statements (with respect to trading in stocks of companies). In the crypto world, that would be akin to analyzing the team behind a particular coin: their financial plan and budget, road map, talent, etc. Basically, the intent is to measure the intrinsic value of the company (or coin dev team).

    Of course, there is no reason to adhere to either or method. As a master of crypto, we should ask "why not do both?"

    When researching a coin to invest in, always start with the fundamental analysis, which was touched on a bit in this guide: https://mastersofcrypto.com/forum/threads/how-to-choose-an-altcoin-to-invest-in.113/

    Once you are satisfied and confident in the coin's dev team and their development strategy, then you can turn on the technical analyst in you and start observing chart trends and patterns. One fundamental theory to chart reading is the Elliott Wave Principle. And here is where we get into our history lesson.

    Elliott Wave Principle

    In 1938, a man named Ralph Nelson Elliott published a book titled "The Wave Principle", which was the culmination of his studies on 75 years of historical stock market data. His thesis was that market prices follow predictable "natural laws", though they may appear to be random and unpredictable. Not just that, but these predictable laws can be measured and forecast using the Fibonacci sequence.

    Going even further into it, he also proposed that market prices develop specific and repeated patterns that are fractal in nature. This means that the same patterns can be observed no matter what time scale you are using to view charts (1 min, 1 hour, 1 day, 1 week, 1 month).

    upload_2017-8-28_12-0-18.png


    One of these most basic patterns observed is the 5-3 move, shown below. The 5-3 move is broken into two parts, color coordinated here as blue and orange. Elliott classified two types of micro patterns, which he called "waves". The two types of waves were impulse waves and corrective waves. Impulse waves are simply trends that show which direction the prices are heading, and corrective waves move against the trend.

    upload_2017-8-28_11-52-19.png
    The first part of the 5-3 move is comprised of 3 impulse waves (waves 1, 3, and 5) and 2 corrective waves (waves 2 and 4), moving in the direction of the market trend. In this particular example, the trend starts up and corrects down. However, note that the opposite can happen as well.

    At the completion of the 5th wave, the second part of the 5-3 move begins, which is a trend reversal. The impulse is now downward, so we have 2 impulse waves (waves A and C) and 1 corrective wave (wave B).

    There you have it, you learned your first pattern! It takes some time to develop the eyes to see a 5-3 move out in the real world. Once you get a knack for it, though, you can use it to determine whether the market is about to reverse its trend.

    [​IMG] [​IMG]

    That's all I got for now, folks. If you have any questions or additional info to add, be sure to comment :cool:.
     
  2. Sean Louk

    Sean Louk Scholar Premium Member

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    I've heard of wave theory and fib trading but never really bothered looking too deep into them. I know some a few basic pattern shapes but I'm a gamblin' man and most of the time I like to trade just based on feel lol. I'd be interested in learning more about the Fibonacci stuff!

    Great content as always! Thanks @xyzzy!
     
  3. pumperNick

    pumperNick Contributor

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    this is awesome, thanks man, learned a lot. actually had not idea trading was this technical
     
  4. PoorKid

    PoorKid Contributor

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    Is there a limit to the amount of waves that happen before a breakout or big dump? Or is it usually 3 waves upward 2 waves down?
     
  5. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    It's not necessarily 3 waves upward, 2 waves down. It's 3 waves impulse, and 2 waves correction. The impulse can be either up or down, so waves can be trending up or trending down, and waves are seen at both the micro and macro scale. So what that means is, no, there is, technically, not limit to the amount of waves that happen before a breakout or big dump.
     
  6. CryptoBoy

    CryptoBoy Beginner

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    If there is no limit, then how is this analysis can help to determine how likely a reversal could occur?
     
  7. xyzzy

    xyzzy Master of None Staff Member Super Admin

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    Good question. We were referring to a breakout or a big dump. Technically, if you are reading an elliott wave correctly, after the correction waves there should be a trend reversal to start a new 5-3 wave. Depending on the scale you are looking at, this could be short term or long term.

    You would have to look at elliott waves on multiple scales (1D, 1H, 30M, etc) AND compare with other indicators and/or patterns to look for big breakouts/dumps (and keep up with news of course). Using multiple indicators in conjunction will indicate whether there could be a trend reversal, the likelihood of a trend reversal, and the strength of the move. However, there is some interpretation here by the trader so experience comes into play as well. It's certainly not an easy thing to predict.

    Does that help your understanding?
     
    CryptoRyuzaki likes this.
  8. russel123456

    russel123456 Contributor

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    good topics for all
     

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