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TAKING THE AMBIGUITY OUT OF THE ELLIOTT WAVE
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I have had great personal interest in the Elliott wave since the first time I saw some old photocopies of R. N. Elliott's market

Triangle corrections are five wave patterns labeled a-b-c-d-e.

Triangles usually occur in the next to last wave sequence, such as wave 4 or wave b.

Figure 7-12 Wave 4 triangle correction.

comments, long before Frost and Prechtor wrote their book. The Elliott wave made sense but was of little use in trading the market. I attributed my inability to count waves accurately to my lack of knowledge and/or experience.

Several things bothered me about the Elliott wave. First, El- liotticians don't actually count the waves themselves; they count the price change that a wave covers. In the example

When triangles occur in wave b, prices tend to shoot out in the direction of the correction wave a being corrected.

Figure 7-13 Wave b triangle.

shown in Figure 7-14, a wave that is two units high and two units wide (the time dimension) would be counted the same as a wave two units high and ten units wide. One thing is certain: while they both would be counted as two units high, they are not the same type of market.

The height of a wave is always counted on the vertical axis, ignoring the time factor. When the time factor is counted, each wave produces a right triangle (Figure 7-15). In studying this, I noticed that there seemed to be a relationship between the area created by the price and the time change of each wave.

This studying was going on in the early 1980s, and I was using a handheld calculator to work out the areas. I found that if you take the area under wave 1 and add it to the area of wave

2, your answer will tend to equal or have a Fibonacci relationship (usually 62 percent) to the area of wave 3. Then, by subtracting the area of wave 4 from the area of wave 3, you end up with the area wave or a Fibonacci relationship.

Armed with this insight, I hired a computer programmer to write the software to calculate and predict the end of the following wave. When we input the beginning and ending prices of wave 1 and counted the number of bars on the time frame I was trading (usually 60-minute bars), the computer would calculate three different time-price targets for the end of wave 2. It also would automatically rank-order these projections, based on probability.

This one step put me quantum leaps ahead in trading the Elliott wave.

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