Elliott Wave

This indicator is probably the only one that tells you where the market is now and where it will probably be later on. However this luxury has its price, the Elliott waves are hard to learn and understand, but they are even harder to spot and use properly. This indicator was initially introduced by Ralph Elliott in the 1930s and it was designed for the stock market, but as we can see, it found its way to Forex as well.

The Elliotticians believe that the mass behavior influence the behavior of the market. In other words, if you can understand the behavior of the majority of the investors, you will be able to predict the price’s movement. The bad news is that you can just “enable” it from the platform; you will have to spot it yourself.

Critics and advantages of the Elliott wave

Forex Elliott Wave

Some people have built their entire trading strategy solely on the Elliott wave, while others strongly disagree with its philosophy. What is your position?

Some people say that the Elliott waves are very subjective. As a matter of fact, if you ask several different traders that use this indicator, they will most likely identify different waves on the chart. How can you rely on an indicator that cannot be calculated by a formula, but you have to find it yourself?

On the other hand, the Elliott theory says that the number of waves is not that important, provided that you already know the general direction. What’s more, Elliotticians try to minimize their losses, while maintaining the proper direction and maximizing the profits.

Some say that the Elliott waves are extremely complicated, because they have a lot of rules, figures, rules and patterns.

However, Elliott traders use resistance and support levels to determine when to enter a trade; they place Stop Losses near the strong levels and even if the level is broken, they can exit with insignificant losses. But if they have caught the number of waves, then their initial investment can increase three or more times.

Although there are many rules in the Elliott wave, only three of them are bulletproof. The rest of them have many exceptions and can mislead traders.

The concept

Forex Elliott Wave concept

The Elliott wave consists of 8 waves: waves 1, 2, 3, 4 and 5 form the impulsive move and waves A, B and C form the corrective move. Furthermore, waves 1, 3 and 5 are impulsive, while 2 and 4 are corrective. If we take a look at the corrective move, waves A and C are impulsive and wave B is corrective. But what is the idea behind these moves and waves? As we said earlier the Elliott waves are based on a psychology theory, but we are not going to dig deep into this matter, instead here are the basics:

  • Wave One. This is the initial, enthusiastic impulse by the first buyers. They have found some reason to buy and they are going for it. That is how the market is being pushed in the first place.
  • Wave Two. Now we have a decline in the impulse, because the initial investors are now closing the orders to collect the profit. In the same time the rest of the investors are waiting for the next opportunity to jump in the game.
  • Wave Three. This is the strongest trend, because nearly every investor will open an order. Those who missed the first train will definitely want a piece of the cake now, and those who invested in the first wave will want to double the profit now. What’s more, when the trend continues to go upwards, even those traders that were not convinced that the trend will hold its direction are now joining in the party.
  • Wave Four. Here the traders take the profit, but the wave should not be as steep as the second, because there are still traders that want to join the trend.
  • Wave Five. Once again, the traders enter the party, but now the market is overbought, so there will be a reversal at some point. And it happens; the reversal is often marked by divergence.
  • Waves A, B and C. This is the analogical down-trend and it follows the manner of the previously up-going one. At this point a new Elliott wave can start or it may not.

The three absolute rules

The truth is that there are only three bulletproof rules in the Elliott wave theory.

  • The Second wave must not reach the starting point of wave One.
  • The Third wave must not be the shortest among waves One, Three and Five.
  • The Fourth wave must not reach the closing point of wave One.

This theory is very complicated, but we have numerous examples that it works. As a matter of fact, Elliott wave alone can be sufficient to make huge profits in the Forex market. That is why we will keep on adding information about the patterns, strategies, indicators and cooperation with other indicators. If you are up for the challenge check out our article section.

The Fibonacci Theory
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