Tuesday, February 28, 2012

Patterned nature of freely traded Markets makes them Predictable!

We, at Waves Strategy Advisors, believe in the theory that freely traded markets are patterned and exhibits fractal nature. This makes them behave in a predictable manner. By pattern we mean that there are certain structures that repeat itself from time to time and can be seen on charts that shows prices of any tradable instrument. The “Fractal Nature” is again an important concept which states that these repeatable patterns occur on varied time scales and can be seen on 1 minute charts to Daily charts to Monthly charts. Fractal structure is seen in nature across from DNA to snowflakes to galaxies and so it is also seen in stock markets which reflect collective emotions and social mood of humans.

Humans behave in a manner, when given a stimulus, in similar and probabilistically predictable fashion. This behavior of acting in similar ways makes us no different than the other creations of nature. Freely traded markets are the only sources that reflect the collective behavior of humans and the current social mood. Highly liquid markets cancel out the random events and what is left is the social mood of the mass and that indicates what we can expect in the future. We believe that any freely traded markets like Equities, Forex, Commodities move in the form of repeatable wave patterns that exhibit fractal nature at various degrees. This behavior was first observed by Ralph Nelson Elliott in 1930s and was later revisited by Robert Prechter in 1980s. This study of waves is now famously known as Elliott Wave.

We identified this important Fractal formation in Indian stock markets on 20th February 2011. The below chart shows a weekly Nifty chart with big “Election gap” when markets hit upper circuit and a 15 minutes chart on the right with a small intraday gap. This is the best Fractal example one can find in stock markets:

Elliott wave provides us the tool to identify these repeating Patterns & Fractal nature of markets and helps us exploit them to our advantage.
chart courtesy: Elliott Wave International

As per Robert Prechter, the above chart shows Elliott's idea of how the stock market is patterned. If you study this depiction, you will see that each component, or "wave," within the overall structure subdivides in a specific way by one simple rule: If the wave is heading in the same direction as the wave of one larger degree, then it subdivides into five waves. If the wave is heading in the opposite direction as the wave of one larger degree, then it subdivides into three waves (or a variation).

This Elliott wave pattern is seen across the world major stock indices.

Everything in this world is symmetrical & patterned and there is no place for randomness to exist for extended period of time. We are against the theory of Efficient Market Hypothesis that claims humans are rational animals. This is against the law of nature and humans do deviate away from rationality and choose the path of herding thereby exhibiting trends & patterns of repeatable forms / structures, making it plausible to predict the markets.

There is no chaos in this perfectly rhythmic world which is driven by the laws of nature and freely traded markets like stock markets are no exception!

Waves Strategy Advisors is one of the elite market forecasting and research house in India providing in depth analysis and forecasting of global markets across varied asset classes including Equities, Commodities, Currencies, Bond Yields. Analysts at Waves Strategy Advisors are qualified Chartered Market Technicians (CMT) & Chartered Financial Analysts (CFA) who employs unique techniques of Economic, Cycle and Intermarket analysis along with Elliott waves to derive at market forecasting. Waves Strategy Advisors also educates and trains investors and public at large about scientific and systematic mode of investing and trading.

Contact information: Email: helpdesk@wavesstrategyadvisors.com, Follow us on Linkedin / Facebook / Twitter: Waves Strategy Advisors


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