Don's Saturday Trading Academy - How to sound like you know about money at dinner parties and surfing

Dear Reader,

I have decided not to swim in my lake this morning as I think the blue green algae would probably eat me (It has grown into something like the monster in The Little Shop of Horrors because of the continued summer). It is bike day!

Anyway as a footnote to me yammering on too much about Natural Gas trading over the last week I thought I would bring a little trading theory into your lives. After this you will be able to bore the pants off colleagues and friends with your fascinating knowledge of market psychology and movement.  I'm just pulling your legs but it is a thing that I feel you should know about to understand a little about wave theory in markets.

The markets are very much like waves crashing on a beach and as a trader you are a surfing Keanu Reeeves trying to catch the big kahuna.  Back in  1938 when the world was veering off a cliff towards World War an american accountant called Ralph Nelson Elliott  brought out a book called 'The Wave Principle ' .

Elliott Wave theory states that  while stock market prices may appear random and unpredictable, they actually follow predictable, natural laws and can be measured and forecast.  To get to this conclusion this guy had studied 75 years of stock market data, including index charts with increments ranging from yearly to half-hourly.   Basically he was describing fractals which would only come into common market language many decades later.

In an effort to make this readable in human I won't go into it in depth but to point out that Elliott Waves can be used to predict trends.

In a nutshell he highlighted that there were 8 wave movements  Five waves move in the direction of the main trend, followed by three in the other direction as a correct (totaling a 5-3 move).  

In case you haven't fallen asleep yet and are wondering why the hell I am writing about this on a Saturday morning. It is because I actually noticed this wave pattern emerging in Natural Gas and it came to mind to go back and read the book again as a refresher.

Funny eh?

In case you think this is all just some financial mumbo jumbo made up rubbish two guys who followed  Elliott's work  in the 1970's (A.J. Frost and Robert Prechter )  called the bull run of the 80's and also  called the 1987 crash days before it happened.

So the next time the market suddenly goes completely in the other direction from the trend you can smile knowledgeably while waxing your board and say to anyone listening 'Why yes it is just following Elliott wave theory'.

Have a top weekend

Don 'Gnarly' King