Fractals are structures that can be split into parts, each of which is a very similar copy of the whole. Mathematicians like to call this property “self-similarity”.
You don’t need to go far to find examples of fractals. They can found all over nature!
A sea shell is a fractal. A snow flake is a fractal. A cloud is a fractal. Heck, a lightning bolt is a fractal.
So why are fractals important?
One important quality of Elliott waves is that they are fractals. Much like sea shells and snowflakes, Elliott waves could be further subdivided into smaller Elliot waves.
The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons, real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.
At this point, enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.
This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find out about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.
Traders take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips.”
This is the point that most people get on the stock and is most driven by hysteria. You usually start seeing the CEO of the company on the front page of major magazines as the Person of the Year. Traders and investors start coming up with ridiculous reasons to buy the stock and try to choke you when you disagree with them. This is when the stock becomes the most overpriced. Contrarians start shorting the stock which starts the ABC pattern.
Those that do fit; are for ‘you' to collect the money from the ‘unpredictable’ dumbs,
and those that don’t; are for 'THEM’ to get the most back from the ‘predictable’ ones.. :)
We trade in a world in which they teach us where to put the stop-loss! ;)
This is how it works. Price is always moved to the level with the most stop orders. Either stop loss, buy stop or sell stop. In order to move the price up someone has to sell at first so that they can buy and move the market up. Sometimes it may be harder to notice, but that is just because it can not be done in too obvious way and they have to accumulate the positions over the time. This will appear as a range bound market.