Implementation of Elliott wave theory

Abstract

Technical analysis is widely used by traders to predict future market movements. The Elliott Wave Theory is a form of technical analysis that was formulated by Ralph Nelson Elliott in the 1930s. He observed that crowd behavior trends and reverses in recognizable patterns, which he termed as waves. He quantified these seemingly random waves of price activity and classified them into particular wave structures.

This project involves the application of Elliott Wave Theory (EWT) to trading and market analysis. The objectives of this project are three-fold: (1) to learn about Elliott Wave Theory and its applications to the stock market, (2) to formulate the principles of EWT into a computer program for automatic wave interpretation, and (3) to develop trading strategies from the wave counts.

A procedure for testing the application of Elliott Wave Theory was developed and implemented in MetaStock. The proposed algorithm was able to extract valid Elliott Wave patterns from market data, and the trading suggestions generated by the expert advisor in MetaStock yielded satisfactory results.