Trading Wisdom from Ralph Nelson Elliott

Hello Traders,

Today I would like to take some time to share some trading thoughts from Ralph Nelson Elliott, the father of the Wave Theory in trading.

Ralph Nelson Elliott

Ralph Nelson Elliott

“Man is no less a natural object than the sun or moon, and his actions, too, in their metrical occurrence, are subject to analysis.  Human activities, while amazing in character, if approached from the rhythmical bias, contain a precise and natural answer to some of our most perplexing problems.” Ralph Nelson Elliott

I find it very interesting that Elliott used the word ‘metrical’ in his observations of man, the universe, and then applied this concept to the market.  This is the basis of the ‘Wave Theory‘ at its core component.  It is a measurement of time, space, and can even be applied to the musical rhythm of the markets.

The Definition of Meter can be applied to mean:

      • pertaining to meter or poetic measure
      • composed in meter or verse
      • pertaining to measurement

I believe the markets move in a rhythm, but I also believe they move in a manipulated manor.  So which is right?  Is there truly a right answer?

No, not really.  It is like having a room full of economists and asking them what they believe about the economy right now.  I would argue it would be tough to get two of them to agree with each other.

Do the markets have a rhythm?  Obviously, R. N. Elliott believed so, and wrote his trading master works around the concept of Wave Theory.  Here is a graphical demonstration of the basis of Wave Theory.

Elliott Wave Theory

Elliott Basic Wave Theory

Elliott went on to say, “The broad advance … was not in a straight upward line, but rather by a series of upward and downward steps or zig-zag movements of a number of months’ duration.  These lesser swings afforded even greater opportunity for profit.

What I find interesting about ‘wave theory’ is the fact you see this type of movement in the markets.  When you start seeing the market as a series of waves, it makes your trading life a lot easier.  You will see a move up, for instance, proceeded by a move down, if the up move has any strength, the down move will stop and the up move will commence again and proceed up past the previous high before the retracement.

The opposite is true of a down move.  It’s an interesting concept that people seem to adhere to as shown on any graph.  You will see nothing goes straight up or down.  Markets do have a rhythm, and they can be traded off a rhythmic pattern demonstrated by the ‘wave theory’ concepts.

Elliott used this to pen his masterwork entitled, The Wave Principle, in 1938.  I find it very interesting that these trading masters found it so important to leave behind their works.  There benefit to us as traders can never be measured.  The footsteps of the trading masters has paved the way for us the modern traders.


Good Continued Trading,

David ‘Tiger’ Knight

About The Author

David M. Knight

I am a 30 Year Futures and Commodities Trading Veteran. In addition, I enjoy games of skill and chance like: poker, craps, blackjack and roulette. During my professional career, I have developed and implemented successful trading strategies and methods; along with winning systems in games of skill and chance. Join with me on our mutual journey together.