Life in a Leaf

According to the field theory, humans resist change and prefer status quo. It is easier. This is why the concept of ‘Life in a Leaf’ is still being challenged and refuted. Life in a leaf metaphorically sums that a fractal defines life and everything connected with it, even economics.
It is almost 80 years since Ralph Elliott formulated the Wave Theory. The theory is based on the observation that market prices unfold in recognizable patterns. It is a simple explanation of how the markets behave and how fractals can forecast. Analysts have made incredible forecasts since 1930s using Elliott Wave Theory. Elliott himself made the forecast of the super decade bull market in 1930s. The subject overshadows every other forecasting tool in terms of accuracy, both over short and long term. But still Elliott Wave remains difficult to understand and apply and continues to have many critics that dispute its value.
The Elliot Wave theory is based on crowd psychology. Human beings behave predictably in a group. Their transition from optimism to pessimism is translated to market movements and forms specific patterns that repeats over and over again. That’s why Elliot Waves theory can be applied not only to stock markets, but also for commodities, currency and practically in each situation that may reflect the psychology of its participants.
According to the wave principle, the market’s trend takes a five wave form, an impulse. A clear structure, sharp, fast, certain, just like the social mood behind it, clear and trended. Three of these five waves, which develop in the direction of the main trend and are called motive, or actionary waves, and two are counter trend movements, named corrective or reactionary waves.
After the certainty of the trend comes the uncertainty, between trends come counter trends, the five waves motive phase followed by the three waves correction. These three wave structures are more complex, mostly overlapping and sometimes unclear. The wave succession repeats itself and can be found at every time frame (degree), from multi-century to the smallest tick. Thus, the theory can be successfully applied for any time frame, by speculators, intraday traders and long term investors.
The complete market cycle consists of eight wave, five up and three down. Each actionary wave can be subdivided into another five wave structure of a smaller degree. For a clear structure, the motive waves are counted using numbers from 1 to 5, while the correctives are counted using a, b and c letters. Going further, there is a specific nomenclature that uses Arabic and Roman numerals and upper and lower case letters, to distinguish between different degrees of the trend. The nomenclature was first established by Ralph N Elliott and is still widely followed.
There are two basic rules that define an impulse. First, wave 2 never retraces more than wave 1. Second, Wave 3 is never the shortest, everything else is a guideline. Elliott wave theory requires patience and a meticulous observation of the markets. It is a test of discipline, test of fractal watching visual skill and test of identifying patterns. We at Orpheus also think it’s a test of common sense, which is extremely rare. The fractal theory of more than 130 years has proved that crowds herd and markets discount information fastest. But still, we humans believe in information and access to it as more important than an Index price history. This is despite the known fact that pattern recognition is considered as a top skill for professional success across a cross section of industries.
There are thirteen types of Elliott patterns. The Wave theory has a mathematical ground and is linked with non linear mathematics, Fibonacci sequence and the number Phi. Though Elliott witnessed the patterns in 1930’s, Charles Dow was the first one to observe them in 1880’s. Elliott was inspired by the Dow Theory and ended up redefining the basic five and proving that life indeed exist in a leaf.