The original wave theory as described by R.N. Elliot in the 1930’s and made popular by Robert Prechter with his excellent book ‘Elliott wave principal’ and his company Elliot Wave International is the default way to understand the path of the markets when you accept they are driven by human emotion. There is little doubt that human emotion plays an enormous part in financial decision making at every level and understanding how these emotions arrive in waves is key to understanding the path of prices in the market. Elliot wave has a basic structure of 5 waves up and three waves down, that pattern can be seen repeating throughout indices, stocks and commodities, the Elliot wave allows you to plot a path that explains why the market did what it did. It provides a road map of what has happened, and it does that in a effective way. What it is not able to do is to tell you what is coming next and as traders that really is all we are concerned with, worse than that for Forex traders (which most retail traders would describe themselves as) it seems not to work at all, not even as a map of where price has been.
Elliot wave and Forex
Elliot wave and forex do not seem to go together there is good reason for that, forex pairs are not things (not in the way shares in a company are or barrels of oil are) they represent the the value of one currency in another currency. A currency pair looks like this CurrencyA/CurrencyB if the pair goes up in value is that CurrencyA appreciating or is it CurrencyB depreciating? You cannot be sure. When shares in Apple go up you know for sure shares in Apple have gone up, we don’t have that luxury in forex.
The next problem with Elliot wave is that we do not know where we are until afterwards, so at any given point we don’t know which wave we are in and consequently we don’t know what is next. Ask two Elliot wavers to give you a wave count and you will get two different answers quite likely one of them would suggest a bearish count and the other a bullish count. This is useless for forex trades, we need to know with some certainty what is coming next, is it going up or is it going down? We car about little else especially not the intricacies of a wave count.
An English economist, former director of Hambros Bank and a professor of economics at the University of London, wrote a book forecasting financial markets in the 1980’s that attempted to come up with a new wave structure that is able to predict where the market is going not just to tell you where it had been. He called his wave structure the price pulse, it has many similarities with Elliot wave but includes many external factors that Elliot ignored especially energy gaps and momentum. The price pulse provides us with a way of forecasting the future regardless of what has happened in the past or where we are in some arbitrary wave count.
Tony Plummer also made many references to the law of 3 and the law of 7, he expanded on these two laws in his second book ‘The Law of Vibration’ which attempts to show how these two laws permeate the human world as well as the financial world, the basic ideas is that things happen in threes or sevens. Plummer provides much evidence as to why and how these laws work, his book is often hard to read and moves into religious areas more than I would like but he does make his point.
Al though neither Plummer nor Elliott made a great deal of cycles, giving them only passing reference, it is clear to anyone in the market that price goes in cycles. We have a bullish period followed by a bearish period and these periods tend to last. People often describe them as the trend, a period of time when price is moving in one general direction. Of course, this should not happen, in efficient markets price should hop from one point to another as the market digests all the available knowledge but these markets are not efficient they are emotional and so they trend.
Trends seem to persist for long periods, the US indices have been trending higher for decades in deed if you had spotted that trend in the 1970’s and bought the Dow for $700 it would be worth $26,000 today.
The Plummer Wave
The discussion of the Dow leads to the basis of the Plummer wave, if something has been trending higher since the 1970’s (that’s 40 years!) why would it choose now to go down. Over that 40 years we have had the dot com bubble, two oil crisis, the financial crisis, countless wars, terrorism and countless presidents yet the Dow just keeps plodding higher.
Rule 1: If it is in an uptrend we only want to buy it and if we cannot buy it we will just watch from the sidelines.
Rule 2: If it is trending higher then it will move in a series of waves, two steps forward one step back and we want to buy the step back, that is where our logo comes form. Buying the dip as it is often called.
Rule 3: the law of three and 7 as described in Plummers work tells us where the pullback is likely to end. We use the law of three and buy the end of the pullback. If that fails we use the law of seven and buy the end of that pullback, if the law of 7 fails the trend is over and we move onto something else.
The price pulse gives us a road map of the future, we know where we are going
Elliot wave gives us an understanding of how each part of the Pulse is unfolding
Cycles tell us when we have moved from one part of the Price Pulse to another
The law of 3 and 7 tells us when to buy and when to sell.
This system is unique to retiredearlyFX, we designed it, tested it and put it live on the markets with our money behind it. You can see the results on results page and from 2019 on MyFXBook, the detail on how it all works is proprietary to us after all it is our product and the way we make a living.