Tom DeMark is adamant that subjective methods used in technical analysis cannot be trusted. When technical analysts cannot agree amongst themselves how to draw them, how can they be tested and how can be people be confident in using them? Perhaps the most subjective of all technical analysis methods is Elliott Wave analysis. There is a joke amongst technical analysts – bring together five Elliott wave analysts and you will get ten views on the markets. Yet all these analysts use the same technique with the same rules.
Tom has distilled this technique into a strict set of rules and measurements, so
strict that a computer can calculate them and display them, marking up the wave
counts according to defined rules. With his rules, everyone sees the same thing and makes the same correct count (if you agree with his rules). Elliott wave is now objective and mechanical – This is Tom DeMark’s D-Wave.
D Wave constructs Elliott cycles with user defined wave counts. The trend cycles develop with five impulse waves followed by a counter trend pattern of three corrective waves. The recommended D Wave settings suggest the waves 1, 3, 5 will become increasingly more significant in the development of the overall trend. The wave 1, 3, 5, and B counts require that the user specified price (high, true high, close) must be higher than the previous ‘N’ number of bars: the 2, 4, A, and C counts require that the specified price (low, true low, close) must be lower than the previous ‘N’ number of bars in an upward trend.
Conversely, wave 1, 3, 5, and B counts require that the user specified price (low, true low, close) must be lower than the previous ‘N’ number of bars, while the 2, 4, A, and C require that the specified price (high, true high, close) must be higher than the previous ‘N’ number of bars in a downward trend. D-Wave uses patterns that are defined by a series of Fibonacci highs and lows. This approach makes a D-Wave objective, e.g. Wave 1 could be identified as an 8 bar high, a
high higher than all previous 7 bars’ highs. The succeeding waves 2, 3, 4, and 5, as well as the correction waves, use Fibonacci numbers.