It is the question that we do to ourselves every day when we see the financial market which response is not simple. I have several years of investing in the financial markets where I have had good moments but also happen for difficult moments which served me to learn of my own mistakes. Finally, every person who undertakes a business or new activity knows this: Perseverance helps us to achieve our goals and personal aims. The same thing happens to the persons who invest in the financial markets.
For theory it is known that to take a decision of investment on these financial markets one must rest principally on two forms of analysis:
Technical Analysis: it is the study of a financial instrument, principally across the use graphs, in order to be able to identify future trends in the price
Fundamental Analysis: it is when I consider financial information or macro-economic valuables to determine the authentic value of a financial instrument.
If my horizon of investment is long term, the fundamental analysis will have major importance on the analysis of the technician. On the other hand, if my horizon of investment is too short or medium term, the technical analysis will have major importance than the fundamental analysis.
There exist financial analysts of the market who think that the technical analysis does not consider the fundamental Analysis because everything already is reflected in the price, therefore it is logical to give the technical analysis a lot of major importance than the fundamental analysis. In another face of the currency, it is those who do not consider the technical analysis in their investment decision because the technical analysis is a series of static tools on a completely dynamic market that change day after day.
In my beginning on the financial markets always I was guiding the technical traditional analysis until after having substantial losses it made me realize that if it was continuing under the same approach it might not generate consisting earnings on a medium and long term. Briefly, the technical traditional analysis seeks to identify supports and resistances, to know about indicators, etc. Though it is important to consider those mentioned tools, these can’t guarantee consistent earnings. They are linear tools on a market that is totally dynamic, where principally it takes the chaos as a principal factor. Think it well, of children we draw one lake in the shape of a circle, snow-capped mountains with a triangle form, etc., but then we realize that they are not like that, so much our world and the universe they are not linear, we either, and we are the ones that give life to the financial market; therefore, it is possible to conclude that the market is not linear. This paradigm represents some of the major challenges for investors who start to invest in the financial markets:
1-They see that the price is rising and automatically they buy.
2-See a strong upward trend that has been supported for one month, read some news on the web, and buy.
Both mistakes a professional investor never commits them!
Let’s change a bit our way of seeing the market
If the market is not still linear how can I generate consistent earnings on the financial market? Remember, the traditional tools of the technical analysis forms a part of our base to analyze the markets financier but they do not assure me to obtain earnings in longer periods of investment, for giving an example; before study a professional specialization I must have concluded the university and before that the college, right? The same thought is applied to the financial markets. One of the tools of the technology, not the traditional analysis that we should consider is Elliot’s Wave.
Elliott Wave Theory
This theory follows the behavior of the price by means of the study of the graphs and of the waves that they form, taking as the base of which the price moves for certain variables and not of random form, but in certain upward cycles and of correction of the price that they can allow us to predict the evolution of the same one. This theory not only focuses on realizing a follow-up to the price, but it provides a new approach to the investor where one can realize that the financial markets move for certain variables. In this point, it goes out of the paradigm of the typical technical analysis that does not give importance to the economic or financial factors that move the persons to take the decisions of investment that generate the rises and falls in the stock exchange prices; this Theory considers those factors, as long as these factors have an impact in the emotional and psychological part of the investing mass since ultimately they are who really generate movement on the financial markets.
In short, Elliot’s Wave will be able to give you the aptitude to generate general photography of the aformentioned emotions.
The first wave is formed when a minor group of investors coincides with the same feeling of a change of trend, so much to the purchase or to the sale, depending on the moment. When this one wave shows a rise (as in the graph), his movement, in general, does not have a lot of force so is the shortest of the sequence of upward waves.
The second wave is given when on the financial market a retirement of earnings takes place for the confidence lack in the upward force of the previous wave. One never gives the case of which wave 2 can fall the totality of the wave 1.
The third wave gives us major opportunities to generate important earnings. Mainly this wave is that of major length and force of the upward waves and of the cycle and confirms a change of trend. To realize this only coarse to observe the inclination of his earring.
The fourth wave is corrective where the price manages to consolidate and serves to give the last impulse giving formation to wave 5.
The fifth wave is the last upward section of the cycle where principally the investors seek to reach new prices (the prices will reach new maximums / minimal). In addition, there does not manage to have the force or the inclination of wave 3.
In the next article, we will speak about sections a to c, which principally are waves of correction of prices.