How to simplify wave analysis can seem a confusing task. However, if we consider the concepts we have previously studied, the process may be more straightforward.
Until now, we have studied concepts and principles such as types of waves, internal characteristics of each kind of pattern, wave channeling rules, price and time alternation, and wave validation criteria, among other aspects.
In this section, we will see procedures in which we will transform the complexity into a basic market structure.
Compaction is the analysis process in which a sequence of adjacent segments that make up an impulse or correction structure (5 or 3) is grouped. Given the dynamic nature of price action, any Elliott wave pattern, once completed, can be labeled as impulsive or corrective. Therefore, this technique cannot be applied, while Elliott’s formation is in progress.
Once an Elliott wave pattern has been completed, the structure of the series can be compacted, which will make as a basic structure. Then, the formation we will use as a base in the following process for the analysis and compaction can be repeated.
Regrouping is the process you perform after compacting waves. At this stage, the wave analyst will use the compacted wave as the base structure of the following wave group and thus construct a series of larger waves, which may be standard or non-standard.
Integration is the process in which the wave analyst uses short-term compacted waves to form larger wave structures to be included in long-term charts. For example, once a short-term wave pattern is completed, this structure can be transferred with its labels to the long-term (or higher degree) chart.
This process can be useful for information references when comparing short-term and long-term graphs to obtain a more logical and accurate idea of the next market movement.
The Principle of Complexity
This principle is useful for the classification of subdivisions of an Elliott pattern. Its usefulness lies in the possibility of combining large scale patterns and determining the relative name of the degree of each segment.
In other words, when a wave advances in the short term, it is straightforward to identify each segment and thus identify and label wave pattern. As time progresses, this wave increases its complexity, and the process of compacting waves is required. Once the wave is compacted, another wave is completed on a higher degree.
Consequently, the complexity tends to grow as the waves increase, and they combine to give way to new waves.
The principle of complexity may not be relevant in the short-term analysis. However, as the horizon of analysis increases, the usefulness of this principle becomes essential. In this respect, the Elliott guidelines identified at the same consecutive level, have the same degree.
The Concept of Degree
Until now, we have used the term Degree superficially referring to an ambiguous time horizon as short, mid, or long term.
In Elliott wave theory, the degree is not related to a specific timeframe, for example, 15 minutes, an hour, 5-day, etc. It is related to the order in which the different wave patterns are completed.
R.N. Elliott, in his Treatise “The Wave Principle,” states that both labeling and degrees are not the ultimate purpose of wave analysis, but are an instrument that allows keeping an order to be maintained within the analysis process.
A wave degree is determined by the wave compacting process from the short to the long-term. Once the short term wave has been completed, it will be a segment in a higher time range or greater degree.
R.N. Elliott defined the following degrees to classify the order of market movements.
- Grand Supercycle
The different degrees are represented in increasing order in terms of temporal magnitude.
On the other hand, Prechter & Frost, in their work “Elliott Wave Principle,” incorporated six additional degrees, as shown in the following table.
In practical terms, to have a reference to the temporality to be used in the analysis process, when Elliott developed wave theory, the smallest data time range available corresponded to the hourly graph. Consequently, the wave analyst can begin by assigning the Subminuette degree to the wave structures that are completed in this temporality and thus advance successively from there.
In this article, we have seen how a systematic process can simplify the process of wave analysis.
The wave analyst can simplify the market analysis helped by the use of the compaction process, which should be realized once completed a wave pattern. Later, by using grades and labels, the wave analyst will be able to maintain a simplified order in the study and, in turn, make a forecast of the next most likely market movement.
In the following article, we’ll start the advanced level of the wave analysis with the study of complex corrective waves.
- Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
- Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
- Prechter, R., Frost.A.J.; Elliott Wave Principle: Key to Market Behavior; New Classic Library; 10th Edition (2005).