Elliot Wave Theory is classed as a type of technical analysis where all information about future prices is derived from the price itself rather than outside forces as is espoused by fundamental analysis.
Many fundamental analysts have discounted the practice, yet Elliott wave lives on, despite the backlash! Elliott wave has emerged from obscure origins, to a point where there are now university courses on the subject. This piece is full of useful applications of the famous trading method. Here you will learn:. Most forex traders ask themselves a thousand questions every single day, while trying to figure out what to do next. What decision will the fed make?
What direction is the economy going? What questions do we need to be asking? Here are four incredibly important questions that a forex trader needs to ask and, that Elliott wave can help you answer. The principle offers traders a model for the likely path of prices, and this attribute allows the trader to make Elliott wave predictions for the future path of prices. This knowledge is very useful because:. The wave principle was introduced by R. The Elliott Wave Principle proposes that collective investor psychology, or crowd psychology, swings from optimism to pessimism naturally.
These movements can be tracked in real-time and, with practice, can be leveraged to make predictions of future market movements. He did not use magic or tricks he maintains he simply applied the wave principle to the letter and caught several moves in that 4 month period, using Dow futures as his trading vehicle. The beauty of the Elliott wave model is that not only can it give you a view on the trend direction.
It also offers insight into the trend maturity. If you know the trend direction. And you know the trend is early in its maturity. Then you can be happy leaving a position open for longer and following that move untill its likely conclusion.
How far is the trend likely to go? Whether it is an impulsive move in the direction of the trend which is in 5 separate waves. Or a corrective move against the trend, the Elliott wave model offers a gauge as to how far the move is likely to travel.
How does it do that? Lets break it down, shall we. The model proposes that the trend unfolds in 5 waves in the direction and 3 against. The internal make up of each wave should also unfold in 5 waves. This feature allows the Elliott wave trader to follow the wave and count it as it is happening in real time.
If you have counted wave 1 up ;then you could expect a correction in wave 2. This action can all but confirm a wave count and you can get ready to enter your long position. When your position is on, you can then count the waves as they happen, wave 3 will move higher usually in a larger move in points than wave 1. All along you hold your position open untill the waves are complete.
Following the waves improves your entry position, and improves your exit point, bagging you more points in the process. The opposite is true for a correction. A correction will unfold in three waves labelled A,B,C. Counting the waves again allows the trader to trace the correction as it happens. Keeping on top of the wave count will give you the best opportunity to ride the price correction to its completion in terms of the waves.
Trade setup using Elliot wave theory. The next question is: Where can I enter a trade with the best risk reward ratio? This involves 3 points of confirmation. Almost like the start of a race! First thing first, There is no point in the world of trying to catch the exact bottom or top of any trend change. You may as well be trying to catch a falling knife!
By this I mean, we have to able to count 5 waves in the direction of the trend, and three waves against the trend. Once the price action has reached the end of its wave 2 correction we can look higher in wave 3. If this happens, it adds a significant weight of confidence to our wave count. We can then say that we have confirming price action. When this happens, It is go time!
As the confidence level is now at its highest, and price has resumed the trend. There are 2 rules that cannot be violated within the Elliott wave model. Wave 2 cannot retrace more than wave 1. Wave 4 cannot enter the price territory of wave 1. These are the positions at which we place our protective stops.
Once our trade is placed. We immediately check these rules and place our protective stops accordingly. We can eliminate much of the confusion and angst by applying these rules and we also minimise our losses to a known amount which allows us to trade another day! Lets jump a bit deeper in to the different types of Wave forms. There are 2 main categories of wave form. Motive waves get the market places, these are the trend waves broken into 5 separate moves. Corrective waves are usually in 3 moves, tend to overlap and make less progress than motive waves.
You can see above the overall wave form. Price projections can be inferred from the length of wave 1 using Fibonacci math , which commonly goes hand in hand with technical analysis. The price went from at the wave 1 low to at the wave 5 high.
A move of points. Following an Elliott wave trade example. You could enter a trade at the GO point illustrated above, at about A protective stop would be placed at the wave 2 low risking about points.
Then using a trailing stops method we could net about points overall. The zig zag correction is the simplest and easiest corrective form to track.
Both the A wave and the C wave tend to be the same length in points. Also the whole wave form tends to fit in a trend channels quite neatly shown in blue. This is a magnified picture of the 3 wave correction off the high in the previous example.
The above example is a perfect realtime example. And to top it off: The whole structure fits in a beautiful parallel trend channel! Using the guidelines of the Elliott wave model we could also trade this structure with a high degree of confidence. Thats two successful Elliott wave trades in the space of 6 weeks, netting points in total!
There are 2 types of flat correction, the regular flat and the expanded flat. Both race out an internal wave structure of waves. While flat corrections are notoriously hard to follow as they unfold, when it resolves, it seems to paint a complete picture. And when the correction completes. You are in a position to make a very high confidence call on the future direction of the market.
The form of the triangle which occurs the most is the contracting triangle. Triangles are a pause in the trend. It is almost as if steam is being built up in the market. Only to explode in the direction of the trend when it concludes. The triangle will have 5 internal waves, each wave made up of 3 distinct moves.
Each separate wave will complete within the range of the previous wave. An Elliott wave trader can use the concluding wave of the triangle as an entry point. Notice the power of the move after the triangle is complete. The aim of a trading strategy is to identify market turning points, either highs for selling or lows for buying. The most attractive characteristic of the Elliott wave model is that it provides an objective method to view the market.
It does not involve itself in news or events. The Elliott wave model says that the market is going to do what the market is going to do! If you can discern an Elliott wave pattern within the often chaotic madness of the price action, you can make a clear judgement on what should happen next. And exactly where you are wrong. And that knowledge is priceless.More...