OVERVIEW
Wave theory is one of the most intriguing and perplexing studies within the entire technical analysis complex. It is also the central subject of the remainder of this book.
Wave theory is one of the most intriguing and perplexing studies within the entire technical analysis complex. It is also the central subject of the remainder of this book.
WAVE CHARTS
Wave theory normally does not generate discrete numeric forecasts, as do the econometric models discussed previously. Nor does wave theory trigger specific market actions, as do the crossover trading systems.
Instead, wave theory converts the raw data into a series of alternating interconnected diagonal lines whose vertices accentuate local peaks and valleys based on the parameters of a reversal algorithm (Figure 1).
WAVE FORECASTING
The object of wave analysis is to discern the heights (y axis) and the widths (x axis) of subsequent waves based on mathematical ingenuity, ratio analysis, and the frequencies of preceding wave patterns called cycles. This is obviously an ambitious task, but given adequate data and resources, we feel that this is an achievable goal.
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| Figure 1 Simple Wave Chart. |
CAVEAT
In addition to the four basic types of technical analysis described in this part (i.e., pattern recognition, econometric models, crossover trading systems, and wave theory), there exist other, less frequently employed techniques. Unfortunately, some of these involve such esoteric methods as astrology, numerology, and the like. Let the trader beware.
In addition to the four basic types of technical analysis described in this part (i.e., pattern recognition, econometric models, crossover trading systems, and wave theory), there exist other, less frequently employed techniques. Unfortunately, some of these involve such esoteric methods as astrology, numerology, and the like. Let the trader beware.
