How to build a trading system: theory and implementation

As argued by Prechter (1990), investors and speculators in stocks are particularly concerned with the termination point of a fifth wave as that event marks the point at which an entire movement is to be corrected by a reverse movement of similar degree.

It's likewise important that terminal corrections be identified, as these points represent price areas where long positions in stocks are to be established.

Every analyst, trader or technician has its own favourite technique to use when trading.

These techniques or technical studies can be subdivided in three categories: trend-following indicators, oscillators, sentiment indicators.

However, most studies, don't reveal information such as the maturity of a trend or a possible target price. The Wave Principle attempts to do that.

As suggested by Gorman, Kennedy, Prechter (2013), there are five ways the Wave Principle can improve the trading:
1. The Wave Principle identifies the trend;
2. It identifies countertrend price moves within the larger trend;
3. It determines the maturity of the trend;
4. It provides high-confidence price targets;
5. It provides specific points of invalidation5.