There are many methods of market analysis, be it stock markets or foreign exchange, based on the Elliott wave theory. These market price analysis systems resonate with a wide range of exchange trading participants.
Having reviewed the classic theories of Elliott Wave Analysis by Robert Prekter and Bill Williams, we cannot overlook the later concept of NeoWave, developed by financial analyst Glenn Neely.
It represents a perfect new approach to wave analysis, which the, according to the author and his followers, different predictive power. So whether or not you will learn in the process of learning NeoWave. And we will start with answers to the main questions of Wave Theory, which before the release of the book by Glenn Neely «Elliott Wave Analysis Skill» not published anywhere.
What are waves and monowaves?
Surprisingly, but there is no clear definition of wave in the work of Elliott and his followers, which is the basis of the whole theory. Neely defines the wave, as a segment of some length, moving in any direction, except vertical. Waves are the result of an imbalance between the total volume of orders to buy and sell. The analyst also introduced a completely new concept of monowaves, which are a kind of building blocks of all wave structures. Monofilament – simplest type of wave, representing a price movement, which begins and ends with a change in price direction.
A mono wave is marked with a blue line on the graph, and yellow – movement in the opposite direction. A monowave can be a plot of any length, on which the price movement is unidirectional, and before and after there is a reversal of the direction of movement.
The perfect monofilament is absolutely straight. But in practice, there are often exceptions.
In the graph above, the blue line marks the price movement with multiple minor changes in direction. It can be considered as monowave until, until the general direction changes, how this happens when the upward movement changes to the downward (marked with an orange line).
A combination of three or five monowaves Neely calls a polywave, of three or five polywaves – multiwave, and out of three or five multiwaves – microwave. Higher-order structures the analyst also calls microwaves, thereby abandoning the classical hierarchy, considered by us in the article, dedicated to wave levels.
One of the key differences “Mastery of analysis” Glenn Neely from the concepts of Prekter and Williams is the principles of plotting. The analyst has developed a completely new system of technical analysis and data management, which we will examine right now.
At the first stage, we divide the graph into several identical time periods.
In our case, such time periods will be day sessions, marked with vertical blue dashed lines.
Next, we divide the resulting time periods into two parts. Now our task will be to identify the minimum and maximum of each period (not half, namely period), as well as the order of their appearance.
If a minimum of a daily session is formed in the first half, then we put a point in its center, corresponding to the minimum price level. In the center of the right half of the time period, put another point, corresponding to the maximum price level of the entire period. If the situation is the opposite and in the first half we see the maximum period, then our actions will be diametrically opposite.
The graph above shows an example of such an analysis. In the first time period on the left, the minimum price is first formed, so in the middle of the left half we put a point at the minimum level (the leftmost blue bold dot on the graph), and in the middle of the right – point at maximum (the blue dot is slightly to the right). A similar situation is repeated in the second segment. And in the third – maximum is formed first, so in the left half we put an end, corresponding to the maximum price, and in the right – minimal.
Now connect the points with lines and get a formation, consisting of monowaves.
note, that some of the obtained monowaves can be combined into one. In particular, two waves, located in the green zone, and two – in yellow.
As for the practical application of the Nili method, it’s not necessary to do such complicated marking with your hands. It is enough to include the marking of daily sessions in the settings of the TradingView chart, after which automatic marking of daily sessions will appear, where you can immediately mark the start and end points of the monowaves.
There is an even simpler option for automatic charting using the NeoWave V0 indicator, which can be easily found in the TradingView library.
Zero definition (source) points and scaling
The effectiveness of NeoWawe analysis is largely dependent on the correct choice of the starting point. At the first stage, we select a market and draw a schedule of monthly highs and lows according to the principle, which I described above.
On the graph, the blue lines are connected by monthly minimums and maximums. Now our task is to determine the monowave, which is closest to the center of the price range.
First, we determine the maximum and minimum points of the period in question. The first one is marked on the chart by a green circle and amounts to 17215 USD. The minimum is 3204 USD. Graphically, I marked it with a red circle.
Find the arithmetic mean of two values.
(17215 + 3204)/2 = 10209On the graph, I designated this level as a horizontal pink line. Now visually you can define a monowave, the beginning and the end of which are located closest to the just calculated center of the price range.
The intersection point of this monowave with the pink line will be our zero point. On the chart, I marked her with a pink circle.
With it we will begin to build the first graph of a smaller order. If initially we used a four-day timeframe, now let’s move on to a four-hour. Neely notes, that the second chart should contain about 60 bars (candles).
The chart above shows a 60 bar sequence, starting at a previously determined zero point. For convenience, I left a pink circle in its vicinity. Now our task is to identify a significant maximum or minimum. Significant minimum is present in the considered sequence, marked in red on the chart.
Now on the two-hour timeframe we will build the following chart, which will be twice as much as the current. The beginning of our final chart for analysis will be a significant minimum point, which is still marked with a red circle.
You can use any other timeframes if you wish, more suited to your current tasks. The main thing is to observe the rule of proportionality, which I will discuss below.
At the final stage, we check the monowaves for the possibility of combining, if they have a similar direction of price movement. And really, the chart above shows two cases (marked by green areas), how two monowaves can be combined into one larger formation.
The effectiveness of visual assessment of the market situation largely depends on the presentation of the chart. In his book, Glen Neely introduces the concept of the proportions of the ideal, in terms of Elliott Wave Theory, graph depending on the type of activity.
There are two types of activity: directed, monowave, forming an increase or decrease in market value and non-directional, which in the trading environment is usually called lateral movement or flat.
Directional activity continues until, while the lengths of the descending monowaves are noticeably shorter than the lengths of the ascending ones (for a bearish trend, vice versa). The length of the second monowave of the directed period usually does not exceed 61,8% first.
A striking example of directional activity is the part of the sequence presented on the graph. Green circle marks minimum rollback. As you see, it does not reach 0,618. And here is the next rollback, whose minimum is marked in red, breaks through level 0,618, which indicates the end of directed activity.
With undirected activity, the rollback length after the first monowave is always greater than 61,8% its length, and each phase is followed by a rollback of at least 61,8% lengths (exception in the form of a single phase and rollback in a series of monowaves is allowed, breaking this rule). A signal to complete the activity is the price going beyond the price range of the entire undirectional period of monowaves.
On the chart we can observe non-directional activity. The first rollback I specifically noted with pink lines, to show, that it can be combined into one monowave in accordance with the rule of neutrality, which we will talk about a little later. As a result, the first rollback in amplitude is approximately equal to the previous upward movement. The following kickbacks also significantly exceed the proportion of 0,618.
This graph clearly shows the fulfillment of the termination condition of non-directional movement. Subsequent price movement ends below level 1,618 (marked with a red circle) relative to the price range of all activity (extreme point levels are marked with black horizontal lines).
Effective application of the Neely technique requires the right choice of the ratio of amplitude and time, in order to match the slope with the type of current market activity. When it comes to directed activity, then its beginning should fall on one of the left corners of the conditional regular square, and the end – to one of the right. In other words, the price movement in the selected segment should go at an angle of about 45 degrees. At the same time, minor errors (up to 25% side lengths of a conditional square) permissible.
When plotting non-directional activity, Neely recommends striving to, so that the price jumps up and down are located about half the right square.
The BTCUSD chart above shows an example of the correct construction of the proportions of directional and non-directional activities. Directional monowaves are placed in green regular squares. If you do not pay attention to minor errors, then we can say, that the rule of proportionality is satisfied (start in the upper left corner, and the end – in the lower right).
The red square encloses undirected activity. note, that all monowaves are located in its upper half.
As you can see in past examples, monowaves, which could be combined, I replaced with one line. But doing this is not always convenient, because in this case part of the information on the price movement is lost.
Glenn Neely proposes an alternative way of designating monowaves. At the end of the investigated monowave and, respectively, at the beginning of the next he suggests putting bold points. At the junctions of the simplest waves of composite formations, such points will be absent, informing the trader about, that this sequence was combined into one monowave.
Rule of neutrality
Most monowaves are diagonally directed. But sometimes you can meet monowaves, developing in the horizontal or near-horizontal direction. Defining them is very simple. Enclose the investigated monowave in the correct square and draw the diagonal from the zero point, component angle of 45 degrees. The rule of neutrality is respected provided, that the graph goes below this diagonal line (in upward movement) or higher (in a downward movement), otherwise the rule of neutrality is not taken into account. That is, the monoflow formation angle is less than 45 degrees, which means it can conditionally be considered horizontal.
Consider a sequence of three monowaves, which I mentioned above (marked with pink lines). The middle monoflow in it is like horizontal activity. To check, is she or not, I drew the correct green square and made a diagonal from the zero point of the monowave in question. As you see, price movement angle less than 45 degrees, which means the formation is subject to the rule of neutrality. Subsequently, you do not have to make complex drawings on the graph to determine the appearance of each monowave, since in most cases the assessment can be done visually.
In the case of multidirectional monowaves, the first paragraph of the rule of neutrality applies. In accordance with it, the endpoint of the first monowave should be considered the point of completion of the horizontal period, which is located above the local minimum or below the local maximum. That is, we kind of transfer the conditional vertex of the first monowave to the end of the second, being horizontal. It’s important to remember, that horizontal activity should not cross level 38,2% lengths preceding it (first left) monowaves. Moreover, rollback following horizontal activity (third monowave in the pattern) must be at least 61,8% first monowave lengths.
In the pink square on the graph, the estimated horizontal activity is enclosed (blue line). Since it goes above the pink diagonal of the right square, then its angle is less than 45 degrees and it really is horizontal. Second condition, according to which subsequent rollback (wave, following horizontal activity) must be at least 61,8% the amplitudes of the monowave under consideration, also performed (rollback ends below mark 1,618). Met and condition, in which the horizontal activity should be less than 38,2% the length of the preceding monowave. Respectively, we can talk about the fulfillment of the first paragraph of the rule of neutrality.
The second paragraph of the rule of neutrality states, what’s the formation, consisting of two unidirectional monowaves and one conventionally horizontal and codirectional with them can be considered one monowave. Wherein, if for convenience of analysis this construction is better perceived as three separate monowaves, then such an interpretation is also allowed.
Returning to the previous example, we can consider the structure, marked with pink lines, like one monowave, what the red bold dots on the graph clearly show, or as a combination of three smaller monowaves.
Moreover, the second paragraph of the rule of neutrality cannot be applied, when horizontal activity is directed in the opposite direction of the preceding and following monowaves.
Rule of relative position of waves
Like Prekter and Williams, Nili offers to designate monowaves by numbers, starting at 1 according to their chronology, and also divides them into impulse and correction. You can read more about this in my past articles.
If the wave does not have distinctive features, then its structure is determined relative to the structure of previous and subsequent market activities. During the analysis of the investigated wave, the value m1 is assigned, preceding her – m0, following her – m2.
The rule of mutual position indicates that, that the past and future waves of the studied monowave have a similar structure. Let’s look at examples.
The green line marked the investigated wave m1 on the graph, and blue – preceding and subsequent waves. Pink horizontal lines mark the maximum and minimum of the monowave m1. After the price crosses the maximum level m1 (green circle on the chart), the fact of the completion of m2 at its minimum point was confirmed. The reverse is also true, when the fact that m2 is completed at its maximum point is confirmed when the price crosses the minimum level m1.
If m2 has crossed the minimum level m1 and is not a compact group of waves (you will learn, what is it, in future articles on this topic), then the first significant reversal, leading to the re-crossing of the minimum level m1 (green circle), is the end of a m2 monowave. The converse is also true, when m2 crosses the maximum level m1. Moreover, by analogy, the presented regularities can be used in exactly the same way for the analysis of waves m0 and earlier.
If, before the intersection of one of the extreme levels m1, more than one monowave is formed, then m0 and m2 can be considered as monowave groups, denoting them, like mg0 and mg2. In most cases, the mentioned groups consist of no more than five simple monowaves, and the number of composite waves in different groups is the same. If, before the intersection of the minimum or maximum m1, only one monowave is formed, m0 and m2 can only be interpreted as simple monowaves.
The graph shows an example of the formation of one monowave before the intersection of the minimum m1. Intersection points in both cases are marked with green circles.
As a result, the rule of relative position of waves can be reduced to one statement: for confirmed wave completion, located to the right of m1, crossing the previous high or low is necessary, and to determine the point of completion of the waves, located on the left side m1, it is required to identify in the past the moment when the price crosses the level of the subsequent extreme point.
This rule applies not only to m0 and m2 monowaves, as well as the wave groups mg0 and mg2, but also on the waves, formed before them or appearing after. At the same time, in the process of analysis, the trader needs to focus on the levels of the nearest highs and lows.
In the chart above, consider an example. The investigated mono-wave m1 is marked with a green diagonal line, and green horizontal – its maximum and minimum levels. After that, as the next mono-wave m2 crosses the maximum level first up (green circle), and then down, we get a signal to complete m2.
The next wave m3 crosses the minimum, and also sets a new minimum level, marked with a pink horizontal line. When m4 comes close to the previous low, m3 can be considered complete. In the analysis of the subsequent m5 monowave, we will already look for the transfer of the level of the new minimum (pink line). And as soon as it happens (pink circle), m4 termination point is considered confirmed.
This concludes the first part of the NeoWave theory. In the next article we will talk more about interesting and useful rollback rules, also called wavelength relationship rules.