First, let’s look at the consolidation patterns of theWave Principle.
Although there are many variations of these, they all have the same basic precepts: price ranges and wave counts, with wave sizes in proportion to each other; breakout price projections based on the sizes of the waves and the consolidation patterns.
In other words, consolidation patterns can be sub-divided into a series of small waves and the size of the pattern determines the extent of the wave that follows on a break-out of the formation.
Starting with the simplest wave called an “I”: a market that will either go up in a straight line or down equally steadily, often one wave following the other.
Putting these two together one ends up with pattern “V”, the second simplest one, which may start with an up move which then reverses, or vice versa.
Things get a little more interesting with “N”, which is a three-wave alternating combination either moving up first or down first.
Then we have five wave combinations:
1. The “P” wave is what we would probably call a triangle, or pennant, formation, where five alternating waves of progressively smaller size can be mapped. These occur in bull and bear markets, with an initial rally in a longer term bull market and kicking off from a low point in a bear market.
2. The “Y” wave, an alternating five-wave pattern, is what we would probably describe as a broadening top or bottom formation.Atriangle-type consolidation whose price swings get larger with time rather than smaller. Again this may start with a rally or with a decline.
Perhaps rather optimistically, Hosoda believed that every single price move can be resolved into a combination of just these five patterns. In Western technical analysis we use the P and Ypatterns as standard, although they occur rarely relative to the whole host of other moves that may be observed, most of which can not be labelled and are seen as general noise. These two patterns are seen as stand alone ones, whereas the other three (I, V, and N) can be used in combinations with each other, succeeding each other.
As well as the basic formations (I, V, and N) Sasaki added one of his own called a “4”, as it is a four-step formation, again where the first leg can start with either a rally or a decline. So, P and Y are used on their own. The other four wave types, which have two variations each (up first or down first), can be combined together to form composite wave formations.
The diagrams below give you some idea as to how quickly these can mutate into many different forms. So the basic building blocks are able to create an infinite number of potential market paths. Now you can see what is beginning to look like the type of moves we so often see in the charts.
Unlike in ElliottWave theory, where all rallies must work out as five alternating waves higher, and all bear markets three moves lower, Hosoda was quite happy to count long term moves as threes, fives or even twenty waves (labelled with lettersAthrough to Z potentially or an infinite number of sequential digits!)
Sequential labelling of the waves that make up a trend.
Alphabetic labelling of the waves where the trend is not so clear.
Personally, I do not feel these are true wave counts, as Westerners understand them. I think Sasaki is merely marking intermediate highs and lows in some way so that these can be pinpointed clearly, prior to further analysis and classification into the different pattern types.
As you can see, Japanese technical analysts bend the rules - so feel free to experiment!
Numbering the waves in a bull market.
The list below is merely how many weeks it took to get from one numbered point to the next. So from point one on the chart it took four weeks to get to point 2. From 2 to 3 ten or eleven weeks, depending on which of the two equal highs you choose. Wave 7’ is explained below.
The reason for calculating the intervals between points will become clear when we discuss the Timespan Principle.
1-2=4 2-6=28/29
2-3=10/11 6-8=26/27
3-4=4 3-7=33
4-5=7 7-9=25
5-6=7 1-3=14/15
6-7=15/16 3-6=18
7-8=11 6-8=26/27
7’-8=6 5-7=22/23
8-9=14 5-7’=27
Wave counts were then adapted to include highs and lows at the same level while keeping the structure of the patterns. In this case successive highs or lows at the same level are marked with an apostrophe. So waveAprecedes waveA’, or wave 1 precedes wave 1’.We could liken this to ElliottWave theory where an X is used to label an extra wave or extension.
Alphabetically labelled wave count in a currency pair that is moving broadly sideways. Note the E’, F’, and J’.
1. Of lesser importance is the labelling of intermediate highs and lows, either with letters or with numbers. As there is no limit to the number of moves, the process seems a bit irrelevant. The only use I can see for this is to make it easier to then subdivide the long term trend into the component short term wave structures.
2. More controversially all and every consolidation pattern can be subdivided into a combination of structures labelled I, V, N, P, and Y, plus Mr. Sasaki’s ‘4’.
Although there are many variations of these, they all have the same basic precepts: price ranges and wave counts, with wave sizes in proportion to each other; breakout price projections based on the sizes of the waves and the consolidation patterns.
In other words, consolidation patterns can be sub-divided into a series of small waves and the size of the pattern determines the extent of the wave that follows on a break-out of the formation.
1. The “P” wave is what we would probably call a triangle, or pennant, formation, where five alternating waves of progressively smaller size can be mapped. These occur in bull and bear markets, with an initial rally in a longer term bull market and kicking off from a low point in a bear market.
2. The “Y” wave, an alternating five-wave pattern, is what we would probably describe as a broadening top or bottom formation.Atriangle-type consolidation whose price swings get larger with time rather than smaller. Again this may start with a rally or with a decline.
As well as the basic formations (I, V, and N) Sasaki added one of his own called a “4”, as it is a four-step formation, again where the first leg can start with either a rally or a decline. So, P and Y are used on their own. The other four wave types, which have two variations each (up first or down first), can be combined together to form composite wave formations.
The diagrams below give you some idea as to how quickly these can mutate into many different forms. So the basic building blocks are able to create an infinite number of potential market paths. Now you can see what is beginning to look like the type of moves we so often see in the charts.
No limit to the number of waves
Long term trends, which are constructed with these basic building blocks, are labelled sequentially, using either numbers or theWestern alphabet. There is no limit to the number of waves needed to complete a long term move, unlike the short term moves which must be in single, double or triple waves.Unlike in ElliottWave theory, where all rallies must work out as five alternating waves higher, and all bear markets three moves lower, Hosoda was quite happy to count long term moves as threes, fives or even twenty waves (labelled with lettersAthrough to Z potentially or an infinite number of sequential digits!)
Personally, I do not feel these are true wave counts, as Westerners understand them. I think Sasaki is merely marking intermediate highs and lows in some way so that these can be pinpointed clearly, prior to further analysis and classification into the different pattern types.
Weekly rather than daily candles
I believe that the wave counts work much better with weekly, rather than daily, candles. Certainly important highs and strong reversal patterns are often clearer to spot on weekly charts. From these wave counts are easier to agree on and the analysis has a better chance of success. I always give more weight to candle formations on monthly and weekly charts rather than daily ones.As you can see, Japanese technical analysts bend the rules - so feel free to experiment!
The list below is merely how many weeks it took to get from one numbered point to the next. So from point one on the chart it took four weeks to get to point 2. From 2 to 3 ten or eleven weeks, depending on which of the two equal highs you choose. Wave 7’ is explained below.
The reason for calculating the intervals between points will become clear when we discuss the Timespan Principle.
1-2=4 2-6=28/29
2-3=10/11 6-8=26/27
3-4=4 3-7=33
4-5=7 7-9=25
5-6=7 1-3=14/15
6-7=15/16 3-6=18
7-8=11 6-8=26/27
7’-8=6 5-7=22/23
8-9=14 5-7’=27
Resistance becomes support
As in Dow Theory, what had been resistance becomes support, and vice versa. The top of a rally then provides support for pullbacks following a break to new highs. Therefore waves are more likely to turn at support and resistance levels. This point is labelled “S” - presumably for support.Conclusion
TheWave Principle has two parts to it.1. Of lesser importance is the labelling of intermediate highs and lows, either with letters or with numbers. As there is no limit to the number of moves, the process seems a bit irrelevant. The only use I can see for this is to make it easier to then subdivide the long term trend into the component short term wave structures.
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