Taking the Fibonacci sequence by the horns, Elliot decided to apply it to history, specifically stock markets over the previous 75 years. He postulated that cycles repeat themselves WITHIN themselves – what mathematicians call fractals. He then defined those sequences as grand supercycles, which span centuries, supercycles which cover decades, cycles that span over years and primary cycles for months. Below those, we have the intermediate for weekly cycles, daily minors, hourly minuettes and subminuette cycles for minutes. Each of these sequences embodies a fixed rhythms of alternating optimism and pessimism, or – in finance – illogical impulses and logical corrections.

Ok, now let’s bring that down to the level of a chart. AN Elliot wave appears when we can see 5 movements – the first, third and fifth being impulses, the second and fourth – corrections. Eliot claimed that the first correction is rarely as large as its preceding impulse and that the second impulse – movement number 3 – is never shorter than the other 2. Correction number 2, or line number 4 is usually lines 1 and 2.

Now, consider that this pattern repeats itself on all time frames, and we have a situation like this: a pattern within a pattern within a pattern and so on. The stronger the presence of the pattern in ONE timespan, the higher the chance of it repeating in the one above it.

Remember, Elliot didn’t have a computer, but a team of Australian scientists in the 1990s DID, and they checked it out. It worked, so they created the Elliot Wave Oscillator. And that oscillator can be easily downloaded into our Metatrader. Like all oscillators, it appears down below, and what it does is, it makes it easier for us to read the market’s conformity to the Elliot principal.

As you can see, the oscillator looks a lot like the MACD, and there’s a good reason for that – it ALSO subtracts one moving average from another, but here the difference is much wider – a 5-day fast and a 35-day slow. Basically, what the oscillator shows us is a trend movement, and the general rules are: 1: if we have an increasing movement in one direction, the trend is strong. And 2: open a position when the 3rd wave begins in the direction of the trend, but not on the 4th, and close it on the 5th.

Also like the MAC-D, we have a moving average on the oscillator to provide a trigger filter. The basic idea here is to open a position in the direction of the trend if the trigger too is moving in the same direction.

Now, if Elliot took his sweet time to make his mark on the markets, Harold Gartley was practically BORN there. He started working on Wall street at the ripe age of 13, made his way up while he studied commerce and business, and wrote Profits in the Stock Market when he was 33.

His basic pattern is very similar to Elliot’s but he uses it to spot potential reversal points. We only have 4 movements here, and different interpretations call for different ratios. I guess Gartley followers have less time for finesse.