Learn Elliott Wave Analysis -- Free

Learn Elliott Wave Analysis -- Free
Often, basics is all you need to know. 

By Elliott Wave International

Understand the basics of the subject matter, break it down to its smallest parts -- and you've laid a good foundation for proper application of... well, anything, really. That's what we had in mind when we put together our free 10-lesson online Basic Elliott Wave Tutorial, based largely on Robert Prechter's classic "Elliott Wave Principle -- Key to Market Behavior." Here's an excerpt:

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Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it. ...the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. In markets, progress ultimately takes the form of five waves of a specific structure.
The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure.
These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one's present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations.
As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern.
The following discussions relate to an underlying bull market... These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

1) First waves -- ...about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other half of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced.

Five Fatal Flaws of Trading

Five Fatal Flaws of Trading

By Elliott Wave International

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit -- and more importantly, do it consistently. How do they do that?

That's an age-old question. While there is no magic formula, EWI Senior Instructor Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don't claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person's life. Maybe you'll find one in Jeffrey's take on trading. We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy's Trader's Classroom Collection, Volume 4. Learn how to get 14 more actionable trading lessons -- FREE -- below.

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Why Do Traders Lose?
If you've been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn't seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can't seem to prevent that invisible hand from depleting your trading account funds.
Which brings us to the question: Why do traders lose? Or maybe we should ask, "How do you stop the Hand?" Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.
Fatal Flaw No. 1 -- Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won't work over the long run. If you don't have a defined trading methodology, then you don't have a way to know what constitutes a buy or sell signal. Moreover, you can't even consistently correctly identify the trend.
How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn't matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can't fit it on the back of a business card, it's probably too complicated.
Fatal Flaw No. 2 -- Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.
Fatal Flaw No. 3 -- Unrealistic Expectations
Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.
Yes, it is possible to experience above-average returns trading your own account. However, it's difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader -- 50%, 100%, 200%? Whoa, let's rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them -- and achieve them -- you will fend off the Hand.
Fatal Flaw No. 4 -- Lack of Patience
The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.
That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you're a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
All too often, because trading is inherently exciting (and anything involving money usually is exciting), it's easy to feel like you're missing the party if you don't trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don't worry about missing an opportunity today, because there will be another one tomorrow, next week and next month...I promise.
I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: "Aim small, miss small." I offer the same advice in this new context. To aim small requires patience. So be patient, and you'll miss small.
Fatal Flaw No. 5 -- Lack of Money Management
The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.
Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50 - $150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.
Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn't even address the size that they trade (i.e., multiple contracts).
To overcome this fatal flaw, let me expand on the logic from the "aim small, miss small" movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you're out all together.
Break the Hand's Grip
Trading successfully is not easy. It's hard work...damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I've outlined, you won't be caught red-handed stealing from your own account.

How a Simple Line Can Improve Your Trading Success

How a Simple Line Can Improve Your Trading Success
Elliott Wave International's Jeffrey Kennedy explains many ways to use this basic tool 

By Elliott Wave International

The following trading lesson has been adapted from Jeffrey Kennedy's eBook, Trading the Line -- 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. You can download the 14-page eBook here.

"How to draw a trendline" is one of the first things people learn when they study technical analysis. Typically, they quickly move on to more advanced topics and too often discard this simplest of all technical tools.

Yet you'd be amazed at the value a simple line can offer when you analyze a market. As Jeffrey Kennedy, editor of the new Elliott Wave Junctures service, puts it:

"A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic or extremely pessimistic."

In other words, a trendline can help you identify the market's trend. Consider this example in the price chart of Google.

That one trendline -- drawn between the lows in 2004 and the lows in 2005 -- provided support for a number of retracements over the next two years.

That's pretty basic. But there are many more ways to draw trendlines. When a market is in a correction, you can draw a trendline and then draw a parallel line: in turn, these two parallel lines can create a channel that often "contains" the corrective price action. When price breaks out of this channel, there's a good chance the correction is over and the main trend has resumed. Here's an example in a chart of Soybeans. Notice how the upper trendline provided support for the subsequent move.

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For more free trading lessons on trendlines, download Jeffrey Kennedy's free 14-page eBook, Trading the Line -- 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. It explains the power of simple trendlines, how to draw them, and how to determine when the trend has actually changed. Download your free eBook >>

This article was syndicated by Elliott Wave International and was originally published under the headline How a Simple Line Can Improve Your Trading Success. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Classic Impulse wave

A Classic Impulse Wave in General Electric
Explore the rules, guidelines and Fibonacci multiples of impulse waves

By Elliott Wave International

Impulse waves are an integral part of the Wave Principle. Understanding their rules, guidelines and Fibonacci multiples will improve your application and your ability to identify high-confidence trade setups.
There are three rules that govern impulse waves:

1. wave two may never retrace more than 100% of wave one;
2. wave three may never be the shortest impulse wave of waves one, three and five. It does not have to be the longest, but it may never be the shortest; and
3. wave four may never end in the price territory of wave one.

Fibonacci multiples are the mathematical basis used to identify wave objectives. For example, we often tend to see a deep retracement in wave two. A .618 multiple of wave one and .382 multiple of wave three are the most common Fibonacci retracements for second and fourth waves. Fibonacci extensions for waves three and five include .618, 1.000, 1.618, 2.000 and 2.618.
For example in this 120-minute price chart of GE, we have an initial move to the downside. Notice the deep retracement in wave 2 - we go back to beyond the .618 retracement at 22.89.

From there, we see a wave three decline followed by a fourth wave bounce -- a correction -- back to the .382 retracement of wave three at 21.78.
The most common Fibonacci retracement for a fourth wave is a .382 multiple of wave three.
The most common Fibonacci retracement for a second wave is a .618 multiple of wave one.
You may notice another extension, or multiple, on this price chart coming in at 21.06. At that level, wave three equals a 2.618 multiple of wave one.
Within the structures of an impulse wave (or in corrections, for that matter), each wave of the pattern is going to have some type of Fibonacci multiple or ratio to prior waves within the structure.
One of the most relevant guidelines pertaining to impulse waves is that when an impulse wave completes, a correction occurs that pushes prices back into the span of travel of the previous fourth wave (most often ending near its terminus).
If we apply this to GE, you can see how it works:

When we finished the 5 wave decline, it set the stage for a countertrend move back up to the previous 4th wave extreme.

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Learn How the Wave Principle Can Improve Your Trading Get FREE access to Jeffrey Kennedy's tutorial, How the Wave Principle Can Improve Your Trading. You'll learn 5 benefits of wave analysis and how you can apply them in your trades. It's straightforward, practical, and highly applicable. Plus get a FREE bonus lesson on setting protective stops! Find Out How the Wave Principle Can Improve Your Trading Today >>

This article was syndicated by Elliott Wave International and was originally published under the headline A Classic Impulse Wave in General Electric. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Global-markets-biggest-disaster

Global Markets, Economies Mired in Early Stages of Biggest Disaster Ever

By Elliott Wave International

The following is a sample from Elliott Wave International's new 40-page report, The State of the Global Markets -- 2013 Edition: The Most Important Investment Report You'll Read This Year. This article was originally published in Robert Prechter's September 2012 Elliott Wave Theorist.
Global markets and economies are mired in the early stages of the biggest disaster ever. Most people think both areas are in the early stages of a prolonged recovery, but in fact they are on the cusp of the second downturn, which will be of epic proportion.

The world is in the grip of a bear market. You wouldn’t know it from watching the S&P and the NASDAQ, but just about every other major market average in the world has been falling, including those of China, Japan, Europe, the BRICs, emerging markets, and even the broad U.S. market, shown in the chart below. And these indexes have fallen far further in inflation-adjusted terms.

Global-equity hedge funds, run by the smartest people in the business, have lost money for clients over the past 10 years. According to Income Research & Management and Bloomberg, over that time annual five-year returns have been up for two years, flat (0.0-0.8% gain) for three years, and negative for five years.

Our recommended short position in 2007-2009 gives us a positive five-year stock market experience. But we returned to a bearish stance too early. If we lived in China, our timing would have caught the exact top of the rally; if we lived in Europe, our current trade would be at a profit, too; but we don’t live in China or Europe. Only in the U.S. does the levitation continue, and even then it’s only in the blue-chip averages. The broad U.S. market, comprising all NYSE stocks, topped out nearly a year and a half ago, per the New York Composite Index shown at the bottom of the chart.

Market perversity is on display here, as both bulls and bears are suffering their own special water torture.
Many bullish fund managers have lost money since April 2011, because their portfolios tend to mirror the broad market. Garrett Jones reminded us that the most-owned stocks among institutions are down by a full one-third since 2000, as shown by the Institutional Index, a capitalization-weighted index of the 75 most-owned stocks by institutions (see the figure inside the State of the Global Markets report). Yet aggressive bears who shorted the S&P or NASDAQ have lost money, too, since the futures-related markets have risen.

It seems pertinent that only the indexes that one can leverage in quantity with futures -- the S&P and NASDAQ -- have risen over the past several months. Maybe this selectivity is for technical reasons, but there might be another explanation. Institutions, not the public, have driven the rally, and they can borrow billions of dollars from banks to leverage their bets. The divergent action among the indexes suspiciously fits the circumstance that major investment banks can make a lot of money by buying futures and then committing their own and clients’ funds to buying stocks that push up those particular underlying indexes. They could even sell other stocks to make it happen. Employing that strategy would account for the big differences in the averages over the past half-year. The low volume and volatility help serve up the opportunity. When the current plateau of optimism ends, the indexes now leading on the upside will catch up quickly on the way down. But in the meantime it’s an annoying situation, as momentum-based sell signals are flashing continually but the market has yet to succumb.

Adding to the injury is that fact that all of these indexes have been re-priced higher in dollar terms due to the temporary re-expansion of dollar-based credits since 2009. A chart on page 7 of The State of the Global Markets report shows the real path of stock values.

Most people seem to believe that the Fed has engineered the stock market rally. I also keep reading about how ECB President Mario Draghi is making stock markets go up by announcing bond purchases. This is wrong. As shown in the chart above, European stocks are below their highest level since the ECB bond-buying programs began. Likewise the largest debt-buying program the Fed ever undertook -- a $1.3 trillion binge -- occurred in 2008, and it failed to prevent the biggest bear market since 1932. The bear market ended three months after the Fed stopped the program. The Fed and the ECB are not the primary cause of optimism or rising stock prices. The rally was due for natural reasons, i.e., a swing toward more positive social mood, which our market forecasting publications anticipated. But QEs and other policies do provide big institutions with nearly unlimited credit, allowing them in optimistic times to put it to use. Doing so temporarily elevates prices beyond what they would be if unlimited credit weren’t available.
Optimism is necessary to allow the Fed and its banks to create credit for financial speculation, which keeps the market levitating. Conversely, when pessimism returns -- as it soon will -- the reduction of leverage will add to selling pressures.

Robert Prechter is the founder and president of Elliott Wave International, the world's largest financial forecasting firm. The rest of EWI's 40-page report, The State of the Global Markets -- 2013 Edition: The Most Important Investment Report You'll Read This Year, is available for download. Follow this link to download the full report – for free.

Moving Averages can Identify a Trade- Free Lesson

Moving Averages Can Identify a Trade - FREE Lesson
These 3 charts help you understand how moving averages work

By Elliott Wave International

Moving averages are a popular tool for technical traders because they can "smooth" price fluctuations in any chart. EWI Senior Analyst Jeffrey Kennedy gives a clear definition:

"A moving average is simply the average value of data over a specified time period, and it is used to figure out whether the price of a stock or commodity is trending up or down... one way to think of a moving average is that it's an automated trend line."

Moving averages are both easy to create and extraordinarily dynamic. You can choose which time frame to study as well as which data points to use (open, high, low, close or midpoint of a trading range).
Jeffrey Kennedy shares 3 of the most popular moving averages in this excerpt is from his 10-page eBook: How to Trade the Highest Probability Opportunities: Moving Averages. Learn how you can download the entire eBook here >>

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Let's begin with the most commonly-used moving averages among market technicians: the 50- and 200-day simple moving averages. These two trend lines often serve as areas of resistance or support.
For example, the chart below shows the circled areas where the 200-period SMA provided resistance in an April-to-May upward move in the DJIA (top circle on the heavy black line), and the 50-period SMA provided support (lower circle on the blue line).

The 13-period SMA is a widely used simple moving average that works equally well in commodities, currencies, and stocks. In the sugar chart below, prices crossed the line (marked by the short, red vertical line), and that cross led to a substantial rally. This chart also shows a whipsaw in the market, which is circled:

Another popular moving average setting that many people work with is the 13- and the 26-period moving averages in tandem. The figure below shows a crossover system, using a 13-week and a 26-week simple moving average of the close on a 2004 stock chart of Johnson & Johnson. Obviously, the number 26 is two times 13:

During this four-year period, the range in this stock was a little over $20.00, which is not much price appreciation. This dual moving average system worked well in a relatively bad market by identifying a number of buyside and sellside trading opportunities.

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How to Trade the Highest Probability Opportunities: Moving Averages Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Now you can learn how to apply them to your trading and investing in this free 10-page eBook. Learn step-by-step how moving averages can help you find high-probability trading opportunities. Improve your trading and investing with Moving Averages! Download Your Free eBook Now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Moving Averages Can Identify a Trade - FREE Lesson. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Happy new year

Wishing you all a happy and Prosperous New year 2013.