Video – Forecasting Markets with Elliott Waves – Retro Series Part 1

Here's an eye-opening gem that was recorded back in 2005 and still rings true today. During a series of webinars with Michael Mansfield, a top-ranked forex portfolio manager, Mr. Mansfield imparts attendees with trading techniques and strategies he utilizes to manage capital in the foreign exchange market.

During this particular video, Mansfield shows investors and traders how to use Elliott Waves to manually forecast market prices with a high degree of accuracy; as high as 60-80%, the level Mansfield's more sophisticated, predictive computer models achieve. Mansfield also correctly predicts a drop in the US stock market 5 weeks prior to 9/11. This actual forecast is used as an example during the video below.

We recommend that our clients use these videos as an educational tool and to help them better understand some of the principles behind the market reports provided in the forecast section of our blog. Managed account investors can also use these videos to get a better understanding of how a successful FX manager analyzes the financial markets.

Notes and Summary on the Video (April 4th, 2005)

Money manager Michael Mansfield starts by introducing trading techniques based on  market geometry that he uses in his strategies. He expresses his confidence in these techniques when he states, "…what is remarkable is that these old master techniques that you could literally do with a pen and a chart paper, or you could do it with your computer, offer very similar results to our highly accurate predictive model, which is running 60-80% accuracy. For a system, that’s very, very good."

Part of Mansfield's methodology when trading discretionally (manually) are based on Elliott Wave Theory. To make Eliott Wave progressions less subjective, Mansfield combines them with other techniques he has developed.

Mansfield then goes on to explain the basic principles behind Elliott Waves and how they become a highly reliable technique when the market exhibits a good wave structure or specific combination of waves (or price segments); "Better than any other single technique of categorizing the market."

In the following paragraph, Michael Mansfield summarizes the sequence of 5 price segments or waves that makes up an Elliott Wave progression and the psychology behind it:

"The bottom line with the Wave principle is this: it starts at the bottom, and the inception of the wave is a zero. The first wave up from that zero point is Wave 1. That’s just short covering from the previous down wave. And then at the top of Wave 1, there are people still looking to go short from the previous downtrend, and so there’s a correction. It’s often quite choppy, and it doesn’t make a new low. That retracement is the bottom of Wave 2. The next wave up is when you get the professionals and funds buying into the market, and that causes a dynamic up move, which is Wave 3. Wave 3 will tend to be the longest out of the five waves. 1, 2, 3, 4, 5. It will have the steepest slope, it will have the most momentum, and will typically run 132% of Wave 1 to as much as 300%, 420% of Wave 1. And then, after Wave 3 goes up, you’ll have a 4th wave correction that will not take out the top of Wave 1. And then, finally you get the 5th wave up. And Wave 5s tend to equal, more or less, Wave 1."

The following bullet list are other important points Mansfield makes about this methodology (what he calls "little gems"):

  • "The important thing to look at this is just, Wave 3 tends to be the biggest. Wave 4 pulls back, and then there’s one more high that has less momentum, typically, than Wave 3. And that’s very easy to notify with divergences and other indicators. And those are places to go short…"

  • "…when the market takes out the Wave 1 top, the market tends to gap. Continuation gap. And that’s because there’s a lot of stops at the top of Wave 1, in case the market does go above Wave 1, people are going to buy at that place. And that’s where you get these gaps. It’s really fantastic. And when you do get those gaps, when it takes out a high, chances are you are experiencing a wave-free run up, and that market’s likely to continue for some time. That’s relative to the size of Wave 1. Actually, higher, more momentum."

  • "Another thing with regard to Elliott Wave that you’ll want to remember for the rest of your lives is after you get a fifth wave up, which is this 5, and it has lower momentum, and it typically has a lower angle of a slope, when the market does start selling off, it will retrace back to the low of Wave 4."

After Mansfield explains how Elliott Waves work in predicting future market moves, he provides an interesting example he previously published in a newsletter 5 weeks prior to 9/11 calling for a large drop in the US stock market. He states, "…the New York Composite had fulfilled the requirements of an Elliott Wave super cycle top."

Throughout this "Retro" series, FX manager Mansfield provides plenty of other forecasts for markets like currencies, gold, oil, interest rates, and others. This will allow you to witness the power of Elliott Waves in forecasting future prices and can serve as a great learning tool for those traders who use or are thinking of adding this methodology to their trading arsenal.

In the next video, Michael Mansfield analyzes various currency pairs and the US Dollar Index. He also introduces the Andrew's Pitchfork technical indicator and shows how he uses it in the analysis of charts.

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