Hi Ed e.a.,
when conducting a »fully fledged« EW analysis, I start with a manually conducted analysis, using the drawing tools for the 5-wave impulse structure. at the very top level of the overall structure of the instrument. This analysis typically spans many years, sometimes even decades.
I have defined 5 different wave degrees as templates, each with a different wavel degree and diffrent colors of the lines and figures.
While drawing this first long-range count, I take advantage of the ratio-levels that MotiveWave prrovides (just go to a wavepoint and right click with your mouse).
As a rule of thumb (as a good starting point), I use the following ratio levels to be shown:
- Wave 2: 61.8% of wave 1
- Wave 3: 161.8% of wave 1 (added to wave 2)
- Wave 4: 38.2 % retracement of wave 3
- Wave 5: 61.8% of wave 1 + wave 3, added to Wave 4
Doing so gives me a first good indicator if I have chosen the correct turning points in the overal chart.
Coming back to your question:
I start the overall count at the lowest point in the past. And, I do trade (and thereby analyse) only instruments that show an overall bullish trend. I do not spent any time and investment money on stocks that are in a long term decline, anticipating that these may turn bullish sometimes - but this is just according to my favor.
Anyway, there is a BIG CAVEAT IN MOTIVEWAVE with both Elliot-Waves and Fib-Levels in general:
To be in line with the original definition by Mr. Elliot's regarding the wave length, the chart display MUST be set to semi-log.
The reason for doing so is that in the 1930ies and 1940ies stock analysts, such as Mr. Elliot, did their chart drawings on logarithmic paper.
And the Elliot-Wave theory is based on human psychology that itself relies on the visual impression by the fib-ratios.
Take look at this example:
(1) a stock value increase from USD 10 to USD 11 is a 10% increase in relative value and the same as
(2) a value increase from USD 1,000 to USD 1,100 (again, 10%)
When you apply a linear chart visualization mode the latter increase by USD 100 will visually appear far bigger than the tiny USD 1 increase.
But in EW-theory, both represent an increase by 10%
Overlooking this is one of the most common mistake when doing Elliot-Wave analysis, often leading to wrong results and people distrusting the EW-Theory in general.
TradingVew, for example, lets the user adjust the ratio-calculation for their fib-Levels for both linear and Log-charts.
Motive-Wave has implemented the pure EW-logic into the fiblevel calculation, requiring the chart to be in log-mode.
Unfortunately, this does also impact how their Auto-EW counting calculates wave lengths over larger stock movements (by more than one order of magnitude). Acually, I am in discussions with their user support to figure out if they need to do some adjustments with their Auto-EW calculation routines.
As a result, I use Auto-EW with some grain of salt for the time being.
....