PRICE VELOCITY, PRICE ACCELERATION, & SIMPLIFIED ELLIOTT WAVE vs. INDICATOR TRADING

In DayTradingCourse.com, we learn to recognize and act upon Elliott wave patterns. The price on the chart can change by moving up or down, or it can stay the same. Price changes occur at varying rates and to varying extents. Over time, they map out a pattern on the chart. Although an infinite number of patterns can occur, many patterns are similar. These similarities are often recognizable in real-time. Elliott wave theory informs us regarding the most commonly observed price pattern types, and what is most likely to occur after a certain pattern type completes. Using the power of our right brains, we learn how to recognize these pattern types, and we make trades based upon what is most likely to occur next. We are looking for two types of patterns to guide our trading. After a continuation correction pattern, prices continue in the original direction. After a reversal pattern, prices move in the opposite direction from the original direction.

Price velocity is the speed at which the price moves, up or down, during a given period of time. For example, the Dow Jones Industrial Average might have a price velocity of 5 points up per 10 minutes. If that velocity stays the same for an hour, then the DJIA will move up 30 points during that hour. Price patterns are formed by periods of time during which prices accelerate, decelerate, or move at a constant velocity. Those are the only things that ever happen on a price chart. If the price on the chart is moving up or down at faster and faster velocities, the price is accelerating. If the price on the chart is moving up or down at slower and slower velocities, the price is decelerating. If the price is moving along a straight line, it has constant velocity and zero acceleration. If the price is moving sideways, which is a special case of it moving along a straight line, it has zero velocity and zero acceleration. Again, these are the only things that ever happen on a price chart.

The above may sound complicated, but it really isn’t. It can be summed up very simply. Prices change at varying rates, or velocities, causing patterns to form on the chart. Many of these patterns are recognizable in real-time as Elliott wave patterns. We can make high probability trades based on that recognition.

If you have studied technical analysis or choose to do so, which we do not recommend, then you can confirm that there are literally thousands of ways to analyze a price chart, using indicators, trend lines, and other measurements. If what is stated above is all that is really happening, then why do the technical analysts make it so complicated? That is a very good question. The answer is simple. The technical analysts and traders have not developed the power of their right brains to perceive what is happening directly off of the price chart, so they use their left brains to create endless calculations hoping that these calculations will reveal something having predictive value. The reason so many methods exist is because the predictive value of all of them is inconsistent at best and nonexistent at worst. Why? Price action is chaotic. Similar price patterns form over time in an infinite variety. Any method that uses calculations must make assumptions about what is relevant, and can only work with a finite number of possibilities. Sometimes the market validates those assumptions and possibilities, and sometimes it doesn’t. So the technician is always left guessing when the method will work and when it won’t. All the while, the focus on technical analysis distracts a trader from what the price chart could be telling him or her directly.

Since price velocity and price acceleration are the only things happening on the price chart, it should come as no surprise that many technical methods attempt to measure and analyze these quantities. Amazingly, virtually all of these methods claim to be measuring something else. They claim to measure momentum using what are known as momentum oscillators. Momentum is mass times velocity. There is nothing on the price chart corresponding to mass. To make matters worse, these indicators do not oscillate. Something that oscillates varies regularly between high and low values. Momentum oscillators do not vary regularly. If they are not momentum oscillators, what are they? These types of indicators all attempt to measure price velocity and price acceleration with the goal of revealing patterns of price acceleration. You may find it hard to believe, but the truth is that this entire branch of technical analysis does not even know what it is attempting to measure. And, since these calculations incorporate limited assumptions and possibilities, sometimes they work, and sometimes they don’t. Never forget that. If these methods worked consistently, there would not be hundreds of variants floating about and new ones being created every day.

Another point to keep in mind is that over 90% of traders consistently lose money. Is it any wonder? Most traders do not use their right brains, rely on severely limited calculation methods, and often do not even know what it is they are attempting to measure. It is often reported that traders as a group have a very high average IQ. These are not stupid people. Many are brilliant. However, understanding and profiting from chaotic price movements requires a type of intelligence that most of these people have not developed. Many traders have had success in the past in businesses where their high IQs served them well. They come into the trading business thinking that the same kind of intelligence will bring them success. They get totally confused, pursue the wrong methods, and consistently lose money. That is an obvious fact.

So if the only thing happening on the price chart is price velocity and price acceleration, and technical analysis is a useless way to measure it, what are we to do? We learn how to perceive it directly from the price chart. We do not need an indicator to tell us that price is accelerating. We can see it directly on the chart. In Elliott wave parlance, acceleration usually occurs in wave 3, and often in wave C of a Zig Zag, and in wave 5. Prices usually decelerate in waves 2 and 4, and sometimes in wave 5. You don’t need an indicator to tell you that there is divergence, and that prices are decelerating. You can see it directly on the chart. This typically occurs with a strongly accelerating move in wave 3, followed by a much less strongly accelerating move in wave 5. Sometimes prices make a sharp reversal. Strong acceleration in wave 5 might be followed immediately by strong acceleration in the opposite direction in wave A or 1. You don’t need an indicator to tell you it is happening. You can see it for yourself. Guided by simplified Elliott wave theory and a very small number of basic simple candlestick reversal patterns we look for, you can learn how to place high probability trades.