Methods of Price Movement Projection (EWA)
This material was released at the book presentation
“Elliott's Code: Wave Analysis of the FOREX Market”
…
A considerable section of the book is devoted to the detailed consideration of the main methods of price movement projection. They are based on statistics of waves correlation inside a pattern, which is given in the book. With the help of these methods the following items can be specified:
- Depth of a correction on basis of the previous trend (trend -> correction).
- Length of a trend on basis of the previous correction (correction -> trend).
- Size of a price movement on basis of one-type waves correlation:
- - length of a trend on basis of the previous trend (trend-to-trend),
- - depth of a correction on basis of the previous correction (correction-to-correction).
In the course of the projection in each specific case this or that method can be preferred. Though the results will be more precise, or objective, if as many methods as possible are applied simultaneously on different wave degrees.
Figure 1. Robert R.Prechter's Utility Manual for the precision ratio compass.
I would like to note that the foundation of these approaches was laid by the worldwide known waver, Robert R.Prechter, in his brochure of 1985 entitled “Utility Manual for the Precision Ratio Compass”. This is workbook # 7 in his classes. At that time personal computers were not so widely spread and waves were compassed on graph paper, that is why this title survived up to this date, though the brochure was reissued three times. About 10 years ago Robert Miner used this material in his book, having systematized it, which is his contribution, for sure.
Now let's consider the methods, mentioned above, in details in practical examples. They are worth it!
Figure 2. Method trend-correction.
Let's begin with the most famous projection method – specification of the depth of a correction on basis of the previous trend. Here actionary wave of the pattern is taken as a fixed reference (blue lines in Figure 2). The depth of the expected correction is calculated by multiplication of the fixed reference by the Fibonacci coefficient, individual for each wave pattern (red lines).
With the help of this method projected depth of the second wave of the impulse can be specified on basis of its first wave length, or the depth of its fourth wave can be specified on basis of its third wave. It is natural, that some statistical figures of expected retracement are characteristic of each wave pattern.
Figure 3. Method trend-correction to specify wave projection.
As an example let's specify possible depth of correction of supposed zigzag on basis of its first leg [a] length. The very supposition that a zigzag is forming was made as the result of wave picture analysis of the daily and weekly charts, which are not described here.
Refer to Figure 3 for upward impulse [a], which, supposedly, is the beginning of expected zigzag. The fact that it is an actionary wave, that is the motive phase of the market or trend, is doubtless, as five-wave impulsive movement may be only an actionary wave. Such movement, at first, always points at the direction of the dominating trend of a superior wave degree. In this case upwards, and soon you will make sure that it is really so. Secondly, once it is completed, either correction (at least) or a new trend in the opposite direction forms. Thus, once any actionary wave ends, the nearest movement is expected to be in the opposite direction.
Thus, actionary wave [a], foregoing expected downward correction, is taken as a reference wave for 100% of the length.
Figure 4. Method trend-correction to specify wave projection.
Then let's mark Fibonacci's line with supposed retracement figures in the chart. This is a well-known row for a zigzag, 38%, 50% and 62% (Figure 4). It is considered that a classical zigzag forms correction with 62% depth. But, at first, ideal zigzags are quite rear in the market. Secondly, math expectation (that is average value) for the depth of a zigzag correction, according Rich Swannell statistics, is equal to 39%. That is why having marked projected edges watch carefully the structure of the forming waves, as the main criteria of the correction ending will be complicated wave structure of the pattern.
Figure 5. Method trend-correction to specify wave projection.
Some time later at depth of 38% downward three-wave zigzag a-b-c formed (Figure 5). With some reserve we may suppose that this is the ending of the expected correction, as we have a corrective three pattern, which has reached the first estimated edge. The wrench is that its duration is rather short in comparison with wave [a] duration. That is why it is possible that this three is just the first part of the whole correction. Consequently, expecting nearest upward price movement, keep watching the forming wave structure.
Figure 6. Method trend-correction to specify wave projection.
Indeed, subsequent upward movement was forming in the corrective, rather than in the motive mode, having formed another three pattern, equal to 117% of the first wave length (Figure 6). Due to the corrective wave structure of this knot we may assume that forming of wave of the zigzag is not completed yet.
As it was the second corrective three after wave [a], it is logical to suppose that the whole correction is assuming the shape of either a double three or extended flat, or running triangle.
According to the known statistics of Rich Swannel, a flat appears at the place of wave of a zigzag twice as often as a double three. Moreover, in case we consider waves correlation inside the flat, the most probable value for its wave is between 95-130% of its first actionary wave with a math expectation of 114%. Our second three corresponds to 117% of the length of the first one, that is, it's close to the math expectation. Thus, it is logical to assume that the flat will form as a corrective wave of a zigzag, that is, to expect nearest completing price fall in the shape of the impulse or diagonal triangle.
Certainly, once the first two waves of correction formed and conclusion about the supposed shape of the corrective pattern was drawn, these waves should be used as fixed references to specify projection of the finishing ending. I will not do it now not to disturb the order of projection methods consideration.
That is why let's watch downward impulsive structure forming.
Figure 7. Method trend-correction to specify wave projection.
In Figure 7 you see that in the long run correction in the shape of the extended flat finished with a completed five-wave impulse with extension in the third wave and correct fibo proportions, having reached 61% depth, close to the projected value.
Thus, on basis of the length of the first wave [a] of supposed zigzag we projected its correction ending, wave ending. Then we made sure that it completed at the estimated values. As the zigzag does not finish here, let's continue its projection.
Figure 8. Survey picture of the corrective pattern on a larger wave degree.
In Figure 8 we see the same two waves of supposed zigzag, but on a larger time frame. In this case we are interested in the area where the final point of our zigzag may be, wave [c] ending. Moreover, it is clearly seen that forming zigzag Y is a component of a larger correction – double or triple zigzag.
Figure 9. Method trend-to-trend.
That is why the next method, trend-to-trend, is more appropriate to specify completion point of either the ordinary or the double zigzag, actionary wave of a pattern is taken as a fixed reference (blue lines in Figure 9). The length of the projected trend is calculated by multiplication of the fixed reference by the Fibonacci coefficient, individual for every wave pattern (red lines).
With the help of this method projected length of the third wave of the impulse may be specified on basis of its first wave length; or the length of the fifth wave of the impulse on basis of its third and/or first wave; or wave C length of the flat on basis of its wave A. It is natural that some statistical values of the expected trend are typical for each wave pattern.
Figure 10. Method trend-to-trend to specify wave [c] projection.
In Figure 10 possible schematic projection of the final wave [c] of ordinary zigzag is marked in red. Impulse [a] is taken as a fixed reference again. In contrast to the previous method, coefficients' values will be different.
Figure 11. Method trend-to-trend to specify wave Y projection.
Moreover, in our case application of this projection method is possible on a larger wave degree, the first zigzag W is taken as a fixed reference instead of impulse [a] (as it is the first actionary wave of the corrective pattern, refer to Figure 11). First of all, it specifies possible points of the pattern completion and then the total of the surrounding project points will form possible values area.
Figure 12. Method trend-to-trend to specify waves [c] and Y projections.
This is how the area of projected values for our example looks like (red dotted lines in Figure 12). Reference waves are marked in blue, projected lines are marked in red. Moreover the edges of the channels are marked for both the ordinary and the double zigzags. The point of overlapping of the upper edges of the channel is the first project point, which should be paid attention to. That is why the most probable row of values is marked on the projected lines, which is either near this point or exceeds it, in case uptrend will be powerful enough (127%, 162% and 200%).
Figure 13. Method trend-to-trend to specify waves [c] and Y projections.
Indeed, some time later price reaches the first estimated point, practically with no pauses (Figure 13). Is it the final point of movement of the whole zigzag? It is not confirmed yet. In this case it is highly recommended to check thoroughly completeness of waves of our supposed impulse [c], and we'll do it. The last upward part is given in the next chart (enlarged view).
Figure 14. Wave counting draft of supposed wave [c] of Y with a wedge.
It can be clearly seen in Figure 14 that upward nine-wave construction, which may be considered to be a completed impulse [c], has formed by 1.26. Moreover, upper edges of the channels have been reached already and the length of the impulse corresponds to projected 127% of the length of the first leg [a] of the zigzag.
The only proportional way of this part marking as a completed impulse is the variant with the wedge as its first wave (i). Unfortunately, in this case the third wave iii of (i) of the wedge turns out to be the shortest one among the actionary waves of the wedge, which is a crude violation of the rules. That is why we have to look for a more suitable variant of wave counting. As the first waves of the upward movement overlap significantly, there are two possible variants: either a wedge, which does not suit us, or a sequence of the initial waves 1-2, 1-2 of descending wave degrees.
Figure 15. Wave counting draft of supposed wave [c] of Y with sequence 1-2, 1-2.
In Figure 15 this variant is given. If our supposition is correct, we may state that the mid of the upward impulse has formed at 1.26, a series of waves 4-5, 4-5, completing impulse [c], of ascending wave degrees, should be expected. In this case we need some other milestones, other projections.
Figure 16. Method trend-to-trend to specify waves [c] and Y projections.
The next nearest fibo coefficients for the previous reference waves are taken as new projected values (Figure 16). These are 162% in case of the double zigzag and 200% in case of the ordinary zigzag (green rectangle). As you see, taken one with another they provide us with a quite narrow area of projected values (red dot line).
Figure 17. Method trend-to-trend to specify waves [c] and Y projections.
As the result, supposed impulse met our expectations and kept rising (Figure 17). In the long run, it finished the full completing of its waves at the area of the projected values, confirming our calculations.
Let's continue our projection. As you know, once any actionary wave is completed, either correction or a new trend in the opposite direction occurs. Our wave Y is such an actionary wave, analysis of the survey picture on the weekly time-frame showed that, supposedly, a triple zigzag, rather than a double one, is forming. Consequently, it is time to project the depth of the second corrective wave X of this zigzag.
Figure 18. Method trend-correction to specify wave XX projection.
As the more reference waves we have, the more possible projection methods we may apply simultaneously, this projection may be calculated with the help of several methods, as 3 waves of the triple zigzag have formed already (Figure 18). First of all, let's rechannel the trend, as its lower edge is the orientation area, where completion of the second wave X should be expected.
One of possible ways of projection is already known, it is specification of the depth of a correction on basis of the previous trend. It was the first one to consider. In this case zigzag Y acts as a fixed reference. Math expectation of the depth of the retracement in the triple zigzag is equal to 57%, the most probable retracement values are 38%, 50% and 62% of the length of its actionary wave Y.
Figure 19. Method correction-to-correction.
Moreover, we may use a new projection method, correction-to-correction, when corrective wave of a pattern is taken as a fixed reference (blue lines in Figure 19). The depth of the correction, projected next, is calculated by multiplication of the fixed reference by the fibo coefficient, individual for every wave pattern (red lines).
With the help of this method we may calculate the projected depth of the fourth wave of the impulse on basis of its second wave, or the length of wave D of a triangle on basis of its wave B. Unfortunately, this method is limited in application only in the patterns with five main waves, as only they form the two main corrective waves.
Figure 20. Method correction-to-correction to specify wave XX projection.
In our case we specify the depth of the second correction X on basis of the depth of the first wave-link of the triple zigzag (Figure 20). Even geometrically it can be seen that corrections in triple zigzags tend to be of an equal size, may be through Fibonacci coefficients. That is why mark in the chart the fibo line with values 78%, 100% and 127% (that is 100% and two nearest values). Math expectation for the second wave-link, according to Swannell's statistics, is equal to 112%.
Figure 21. Two methods of wave XX projection simultaneously.
This is how our projected lines look like, according to two methods applied simultaneously (Figure 21). Please note that a narrow area of the most probable projected values is at the lower edge of the channel.
Figure 22. Two methods of wave XX projection simultaneously.
Later on we see that downward correction keeps forming in the shape of the supposed zigzag (Figure 22). Having reached the first projected values around 38% and 78% on the different fibo lines, the price has formed only a part of a correction – the third wave (iii) of the final impulse [c]. The same thing is signaled by the wave structure and the fact that the lower edge of the channel has not been reached yet. Consequently, it is necessary to wait for zigzag XX completion somewhere at the subsequent boundaries.
By this moment in accordance with correction XX several waves have formed already, which may be used for specifying projection on smaller wave degrees. That is why it is high time to shift to a smaller time-frame to specify our projection point.
Figure 23. Several possible reference waves for specification wave (v) of XX projection.
In Figure 23 wave counting draft of forming correction XX is given. It can be clearly seen, that final impulse of downward zigzag is forming. Its fourth wave has formed in the shape of the truncated zigzag, which foreshadows a powerful fall. Having four completed waves of the impulse we may take any of them, except the second one, as a fixed reference to project the final actionary wave. The first and the third waves of the impulse are appropriate for projection of the fifth wave by trend-to-trend method. To show the new method let's take only the fourth wave of the impulse to specify the length of the trend on basis of the previous correction.
Figure 24. Method correction-trend.
According to this method corrective wave of the pattern is taken as a fixed reference (blue lines in Figure 24). The length of the projected trend is calculated by multiplication of the fixed reference by the Fibonacci coefficient, individual for every wave pattern (red lines).
With the help of this method projected length of the third wave of the impulse may be specified on basis of its second wave, or the length of wave C of the zigzag on basis of its correction B. It should be mentioned, that this method gives more precise results if projected trend is not forming an extension.
Figure 25. Method correction-trend to specify wave (v) of XX projection.
In our case to specify the length of the fifth wave of the impulse we take its corrective fourth wave as a fixed reference (Figure 25).
Two additional features of the formed wave construction may provide us with possible projected targets. On the one hand, in our case extension in the fifth wave of the impulse is hardly probable, as it has already formed in the third wave. Consequently, it should not be expected, that the fifth wave will exceed the forth one more, than 1.62 times. On the other hand, the fourth wave formed in the shape of the truncated zigzag - an evident signal of the forthcoming powerful price fall. In this case, vice versa, price may be expected to reach, at least, 162%. Moreover, there is a lower edge of the impulse channel there. That is why let's mark the most probable values 127% and 162% on the Fibonacci line.
As in this case we project the fifth wave of the impulse, we should use the so called "R.Balan's Fifth Measurement Method".
Figure 26. R.Balan's Fifth Measurement Method to specify wave (v) of XX projection.
Actually, this is a slightly modified method “trend-to-trend”, described earlier, except one thing – the distance between the beginning of the impulse and the ending of the third wave, rather than one actionary wave, is taken as a fixed reference (blue line in Figure 2b). All the rest is the same as in method trend-to-trend. For our case, expecting a deep price fall, foreshadowed by a truncated zigzag, mark on the line 62% and 78%.
Figure 27. Two methods to specify wave (v) of XX projection simultaneously.
As the result we see that both projection methods provide us with a narrow area of projected values at the lower edge of the channel, close to which the final fifth wave of the impulse ends, crowning correction XX (Figure 27). Price has reached the lower edge of the impulse channel and confirmed our calculations and estimations.
Figure 28. Four methods to specify wave XX projection simultaneously.
If we pass to a larger time frame now, it can be clearly seen there that all the four projection methods provide us with a narrow area of projected values near the lower edge of the channel (Figure 28). Whereas the second corrective wave X ends close to this area.
As you can see, applying only one-two methods to project the market movement together with the analysis of the current wave structure and trend channeling, one can get good results. Whereas application of every possible method of projection on different wave degrees simultaneously will make it possible to confirm and specify the areas of projected values additionally.
Reference
November 28, 2006 The ideas given above are purely informational purpose only. This report was translated by Natalya.
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