Overview: What are the Application Limits?
Elliott Wave is a theory derived from observing and studying the price movements of stock indexes, and basically applies to stock indexes. R.N. Elliott originally targeted US stock indexes, and the foundation of the theory rests on the characteristic of long-term uptrends in stock indexes.
Therefore, in other markets such as FX and commodities, where price determination mechanisms differ from stock indexes, the applicability of Elliott Wave is subject to certain limits. On the other hand, among individual stocks, large-cap stocks that continue long-term growth share the characteristics of stock indexes and are easier to apply Elliott Wave to.
Applicability by Market
The applicable range of Elliott Wave differs by market. Their characteristics can be summarized as follows.
Detailed Points
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Stock indexes: Long-term uptrends continue → Elliott Wave can hold for charts of any length
Stock indexes have the property of continuing uptrends over the very long term against the backdrop of economic growth. They are therefore the original target of the theory, where Elliott Wave can hold for charts of any length.
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FX: Determined by the relative relationship of two countries’ currencies, so it does not have the property of moving in one direction over the very long term
FX is determined by the relative relationship of two countries’ currencies and does not have the property of moving in one direction (upward) over the very long term like stock indexes. Because it moves up and down based on the balance of two countries’ economic strength, the very definition of a long-term trend differs.
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Commodities: Economic growth raises demand, but technological innovation, substitutes, and productivity improvements are factors that push prices down
In commodity markets, while economic growth raises demand, supply-side factors such as technological innovation, the emergence of substitutes, and productivity improvements push prices down. Because demand-side and supply-side forces are balanced, they do not necessarily move in one direction over the long term.
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FX and commodity applicability: generally up to cycle degree and below
For the above reasons, Elliott Wave analysis of FX and commodities is generally applicable up to cycle degree and below (→ Wave Degree). For supercycle degree and above, the theory is said to tend not to hold.
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Individual stocks: Large-cap stocks with market caps of trillions of yen or more that continue long-term growth fit Elliott Wave well
Among individual stocks, large-cap stocks with market capitalizations of trillions of yen or more that continue long-term growth are targets that fit Elliott Wave well. This is because they share long-term uptrend characteristics with stock indexes. Conversely, application becomes difficult for small-cap stocks and stocks with stagnant growth.
Related Terms
Summary
The Application Limits of Elliott Wave for FX and Commodities is the theoretical limit that, while Elliott Wave works best on stock indexes, its application is constrained in FX and commodity markets. The applicable range for FX and commodities is generally said to be up to cycle degree and below.
Summing up applicability by market: stock indexes and long-term-growth large-cap stocks have high applicability, while FX and commodities are limited. After understanding the differences in price determination mechanisms, it is important to use Elliott Wave by narrowing it to appropriate degrees and targets.
