By Bryce Gilmore of Bryce Gilmore & Associates Pty Ltd *

Elliott Wave theory has an enormous influence over trader behavior these days, so it is important that you have at least some idea of the simple concepts associated with its use.

I'm not going to try and give you a complete overview of the entire theory in one sitting, but a few simple hints on how to know the likely direction of the market could help you in the future.

Elliott Wave is not just about counting waves (swings in the market) and giving them labels (although you can do this if you choose). The price relationship between the swings in progress is far more important.

Swings can be broken down into degrees (price amplitude). Looking at it this way will solidify the concept for you far better than inventing new rules when something out of the ordinary occurs.

My approach is to differentiate the swings into degrees -- smaller swings, small swings, medium swings, large swings, larger swings and on up to major-degree swings.

The main concept to understand is this: A trend of similar degree remains intact for as long as the corrections in that trend do not overbalance. This rule is applicable to trends that are unfolding in all degrees.

Overbalancing occurs when the next larger correction exceeds the price amplitude of the corrections in the prior series of lesser-degree swings.

Take a look at this example I have drawn and see if you can understand the concept. For the example, I have divided the swing concept into minor-, medium- and major-degree swings. Nevertheless, in real life, the minor-degree swing can be subdivided into smaller and small swings. The major-degree swing can be divided into larger and large swings.

Now, as a means of introducing you to the concept, I have a real-time, up-to-the-minute example for your perusal.

The real world is not exactly as perfect as we would like because the Elliott Wave theory introduces other mechanisms, such as price retrace theory in ratios of price expansion swings in 38.2, 50 and 61.8. Nevertheless, when you can understand how one aspect of Elliott Wave opens the door to new levels of understanding, you will have a better grasp of why Elliott Wave technicians can adjust their opinion as the markets move along.

Real-time example:

I hope this short description opens your eyes to the extent of analysis that can be achieved in the marketplace if you learn how others use the theories that have been taught and passed on down through the years.

The next time you see the market reverse on a 1:1 correction of similar degree -- or reverse on a 38.2, 50 or 61.8 retrace level of greater degree -- you will appreciate that there is more to market direction than meets the untrained eye.

*Reprinted (and modified) with permission from Bryce Gilmore of Bryce Gilmore & Associates Pty Ltd (www.wavetrader2004.com)