Two names synonymous with Technical Analysis are Gann and Elliott, each having their die hard followers. And as in many walks of life, each school of thought claims their area of study to be the best. Just look at Diets, Martial Arts, Weight Loss programs or anything related to some kind of personal improvement. Practitioners of each style or method claim theirs is the best hands down. The funny thing is that most work in a similar manner and more often than not, to the same end. Trading in many ways is no different. As a result I am a fan of the saying, “If it works… use it!!”
Research into relationships within Elliott Wave patterns has lead to some interesting discoveries that support a theory used heavily in both Gann and Fibonacci analysis. Before I explain further, let’s look at how this conclusion was reached.
In building the ProfitSource Software, we decided that we needed to be able to give targets as to where Waves within an Elliott pattern may finish. In other words, time and price projections – what we call TAPPs. To do this, 20 years of data and over 30, 000 completed Elliott Wave patterns were analysed.
From this analysis we found that if you compare the length in price of Wave 4 with the length in price from the start of Wave 1 to the end of Wave 3 (0-3), a clear pattern emerged. That pattern was essentially this: 66% of all retracements finished on or before 38% of the major range – in this case 0 – 3. Where do we recognize this from? The meaning of Life, the Universe and Everything? Tom Scollon’s favourite number?? Well maybe, but actually 38.2% relates to Fibonacci analysis and the golden ratio. Many technical traders have used this level over the years and it is mentioned in countless text books and journals. However, it is always good to see these things proven by statistical analysis!
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Moving on from this, 90% of all Wave 4s finished at or before 50% of 0 – 3. For those acquainted with Gann, you will no doubt recognise 50% as a figure Gann paid particular attention to. Seeing the significance of the 50% proven by statistical analysis was obviously an interesting discovery, especially for someone who has studied the work of W. D. Gann and David Bowden.
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For those not accustomed to Elliott, all the waffle about Wave 4 retracing against Waves 0 – 3 can easily be boiled down to a retracement against a major range, low to high or high to low.
So the next time a market bounces off the 50% level from a previous major range, remember that Gann referred to this level long before the kind of analysis we have at our finger tips was ever available. The philosophical question for all of us is, “Do these levels and patterns work because they occur in all walks of nature or are they a self-fulfilling prophecy?”. Personally I think it’s a bit of both!