The following theories provide different perspectives on market movements, and traders often use a combination of them to make more informed decisions. It’s important to note that these theories are not foolproof, and market behaviour
can be influenced by a wide range of factors. Traders often use these theories as part of a broader toolkit for technical analysis and risk management.
ELLIOT WAVE THEORY
Shortcode is empty
Developed by Ralph Nelson Elliot, this theory suggests that financial markets move in repetitive patterns or waves. It identifies two types of waves: impulsive waves that move in the direction of the main trend and corrective waves that move against the main trend. The waves are further categorised into five impulsive waves and three corrective waves.
We cover this as part of item 7 as a mandatory subject.
WYCKOFF THEORY
– Accumulation: Large investors build positions without significantly moving prices ;
2. Price and Volume Analysis:
3. Wyckoff Schematics:
4. The Law of Supply and Demand:
5. The Law of Effort vs. Result:
6. The Law of Cause and Effect:
The Wyckoff Theory, developed by Richard D. Wyckoff, is a method of technical analysis that aims to understand and predict market trends by analyzing price and volume behavior. It focuses on the actions of large, institutional investors (referred to as the “Composite Man”) and consists of several key principles:
1. Market Cycles**: Markets move in cycles of accumulation, markup, distribution, and markdown.
– Accumulation: Large investors build positions without significantly moving prices ;
– Markup: Prices rise as the public starts buying ;
– Distribution: Large investors sell off their positions, distributing to the public :
– Markdown: Prices fall as the selling continues and public buying wanes.
2. Price and Volume Analysis:
Price movements and volume patterns are analyzed to determine the phases of accumulation or distribution.
3. Wyckoff Schematics:
Visual models (schematics) of how accumulation and distribution phases typically play out.
4. The Law of Supply and Demand:
Prices rise when demand exceeds supply and fall when supply exceeds demand.
5. The Law of Effort vs. Result:
Analyzing the effort (volume) behind price movements to predict the likely future direction.
6. The Law of Cause and Effect:
The cause (accumulation/distribution) leads to an effect (markup/markdown), which helps in setting price targets.
Overall, the Wyckoff Theory helps traders and investors identify potential turning points in the market and make informed trading decisions based on the behavior of significant market players.
DOW THEORY
Named after Charles Dow, the Dow Theory is one of the oldest technical analysis theories. It focuses on identifying trends in the market. According to Dow Theory, markets move in three phases: the accumulation phase, the public participation phase, and the distribution phase. It forms the basis for many principles of modern technical analysis.
GANN THEORY
Created by W.D. Gann, this theory is based on the idea that price movements follow geometric patterns and mathematical relationships. Gann used angles, squares, and circles to analyze and predict market movements. His theories involve the concept of time and price, and he believed that certain angles in charts could predict future price movements.
FIBONACCI RETRACEMENT
While not a comprehensive theory on its own, Fibonacci retracement is a popular tool used in technical analysis. It is based on the Fibonacci sequence and ratios, and it helps identify potential levels of support and resistance in a market. Traders use Fibonacci retracement levels to make decisions about buying or selling asset.
STAN WEINSTEIN
Stan Weinstein was a financial analyst, author, and newsletter writer who gained prominence for his work in technical analysis. He is best known for his book “Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets,” published in 1988. In this book, Weinstein outlines his approach to technical analysis and provides insights into his trading strategies.
Weinstein’s key contribution to the field of technical analysis includes the following principles:
Stage Analysis:
Weinstein introduced the concept of “stage analysis,” which involves identifying the different stages of a stock’s price movement. These stages are Accumulation, Markup, Distribution, and Markdown. By understanding which stage a stock is in, traders can make more informed decisions about when to enter or exit a position.
Trend Following:
Weinstein emphasized the importance of following the prevailing trend. He recommended buying stocks in the early stages of an uptrend and selling or shorting stocks in the early stages of a downtrend. This aligns with the classic trend-following principle of “the trend is your friend.”
Volume Analysis:
Volume is a crucial factor in Weinstein’s analysis. He believed that changes in volume could indicate the strength or weakness of a price movement. Rising prices on increasing volume were seen as a sign of strength, while falling prices on increasing volume suggested weakness.
Moving Averages:
Weinstein used moving averages to identify the overall trend of a stock. He paid close attention to the relationship between short-term and long-term moving averages to determine the strength of the trend.
Stan Weinstein’s approach is practical and has been influential in the field of technical analysis. Traders often find value in his systematic approach to analyzing trends and market stages. While markets have evolved since the publication of his book, many of the principles he introduced remain relevant and are still used by traders and investors today.
FIBONACCI RETRACEMENT
While not a comprehensive theory on its own, Fibonacci retracement is a popular tool used in technical analysis. It is based on the Fibonacci sequence and ratios, and it helps identify potential levels of support and resistance in a market. Traders use Fibonacci retracement levels to make decisions about buying or selling asset.
