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Who is R.N. Elliott and How Did He Discover the Wave Principle?
An accountant by training, he discovered wave patterns in stock price charts

By Susan C. Walker
Fri, 26 Jul 2013 17:30:00 ET
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Editor’s note: In the 1930s, R.N. Elliott (1871-1948) discovered that the stock market moves in recurring patterns that he called waves. He formulated the Wave Principle based on these wave patterns. We are celebrating his July 28 birthday with a series of articles.

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R.N. Elliott at age 55Whenever I learn that some bright person has discovered a new concept or invention, I can’t help but think that the idea just came to him or her out of the blue. My model is the Greek mathematician Archimedes shouting “Eureka!” in the bathtub once he realized how he could know whether the king’s new crown was made of pure gold – by measuring the amount of water it displaced.

What I often forget is that Eureka! moments rarely come out of the blue. They happen only after days, months and years of turning a problem over in the mind … testing theories and throwing them out when they don’t work … studying the problem from every angle and finally seeing a way to solve it – and sometimes actually seeing a pattern, which is how Ralph Nelson Elliott discovered wave patterns on stock charts.
 
When people ask Robert Prechter, the founder and president of Elliott Wave International, what will best help them understand Elliott wave analysis, he tells them that you need a good visual sense in order to see patterns. It’s like being able to look at a painting and almost immediately see the underlying beauty of its form and structure.
 
The visual sense is so important, because, without it, you will have trouble seeing the rhythm and patterns in price charts. Nowadays, we have a guide to seeing those patterns via the books that Prechter has written, such as the classic textbook he wrote with A.J. Frost, Elliott Wave Principle -- Key to Market Behavior. There is also EWI’s website with its online guides to learning about waves on price charts; not to mention our educational trading service, Elliott Wave Junctures, which teaches you how to use wave analysis as you trade.
 
Yes, these days we have many ways to help you see the wave patterns on your price charts. But suppose you had been the first one to see them. How would that have happened? What would it have felt like? Fortunately, we have a fairly good idea, thanks to research by Prechter and the writings that R.N. Elliott left behind.
 
“I hope you appreciate that application of rules requires considerable practice and a tranquil mind.” -- R.N. Elliott to Charles J. Collins, who published Elliott’s original columns about the Wave Principle
 
Clearly, Elliott was a man who believed in rules. He was an accountant by training, after all, who followed mathematical and accounting rules while working with corporate financials. But what about that tranquil mind he refers to? The answer lies in the 60-page biography Robert Prechter wrote as an introduction for the book, R.N. Elliott’s Masterworks, published by New Classics Library, second edition, 2005. I have relied on that biography for this distilled version of the story of Ralph Elliott and his discovery.
 
Early Years
Elliott was born in Marysville, Kansas, on July 28, 1871, and his family moved to San Antonio in 1880. He grew up speaking and writing Spanish and lived in Mexico when he was 15 to 16 years old. At age 20, he left home to work on the railroads in Mexico during North America’s railroad boom. About five years later, he began to learn accounting, and for the next 25 years, he worked for many U.S.-owned and Mexican-owned businesses, mostly railroad companies in Mexico, Central America and South America.
 
Middle Years and Career Changes
In 1902 or 1903, when he was in his early 30s, Elliott married Mary Elizabeth Fitzpatrick who was working in Mexico, probably with U.S. advisors on Mexico’s currency reform. Beginning in 1911, revolutions overtook Mexico, and the civil strife eventually led the couple to leave in 1916 and to move to Los Angeles where his parents and sister lived. By 1920, the couple had moved to Mary’s native New York. In his early 50s, Elliott decided to use his accounting expertise in a new business arena: restaurants, cafeterias and tea rooms, all of which were thriving in New York City. He wrote a column for a monthly business magazine, called “Tea Room and Gift Shop,” and then a book based on his columns.
 
Meanwhile, a connection with a distinguished lawyer and author named Jeremiah Jenks led to his being appointed by the U.S. State Department as Chief Accountant for Nicaragua. With his deep knowledge of Latin America and a new interest in writing about political and social analysis, he began working on a new book, The Future of Latin America.
 
Illness Leads to Discovery of the Wave Principle
He came back to New York from Nicaragua not only to work on the book but also because this adventurous traveler suddenly found himself suffering from a severe alimentary tract illness that persisted for months, eventually becoming a debilitating form of anemia. For five years from 1929 to1934, he was often bedridden and weak, struggling with the disease that forced him to retire. However, he was still possessed of a curious and acute mind, which he turned to the stock market … and he happened to do that during the roaring bull market, the great stock crash, and the dramatic bear market that followed. His interest in the stock market led him to the works of Robert Rhea, a student of Dow Theory.
 
Prechter takes up the story of Elliott’s progress:
 
“Not unlike the Dow Theory genius Robert Rhea, who suffered from tuberculosis and was bedridden at the time, Ralph Elliott, who spent long hours on his front porch recuperating and studying, began to make some fascinating observations concerning the movement of prices on Wall Street. His essential path of inquiry, i.e., looking for patterns in aggregate stock price movement, was undoubtedly directed initially by exposure to the tenets of Dow Theory. However, Elliott’s ultimate discovery was all his own, as over a period of several years he painstakingly uncovered the Wave Principle of market behavior by studying empirical evidence.
 
‘The more desirable the goal,’ Elliott had said once before, ‘the greater the trials which have to be met and conquered for its achievement.’
 
In investigating the possibility of form in the marketplace, Elliott examined yearly, monthly, weekly, daily, hourly and even half-hourly charts of the various indexes covering 75 years of stock market behavior. He constructed the hourly charts from a data series that began for the Dow Jones Industrial Average on October 5, 1932, and the half-hourly charts from figures he collected off the tape and in the trading room of a brokerage house.
 
“Around May 1934, … Elliott’s mission began to be fulfilled. His numerous observations of general stock market behavior began falling together into a general set of principles that applied to all degrees of wave movement in the stock price averages….”
 
Ralph Elliott had found his Eureka moment.
 
“The former ‘Expert Organizer’ of businesses, through a meticulous study of detail, had uncovered the organizational principle behind the movement of markets. When he started applying this principle over the next several months to expectations for the future path of the stock market, he felt, as he later put it, ‘something like the inventor who is trying to become proficient as an operator of a machine of his own design.’ As he got more proficient in the application of his newly discerned rules and guidelines of wave formation and corrected initial errors in their formulation, they began to amaze him with their accuracy.”
 
Elliott never recovered his full health, but he began to get his old energy back, and he went on to develop his Wave Principle theory with the support of his correspondent Charles J. Collins.

  
 

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The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.