Mention of the Advanced Elliott Wave pattern often conjures up images of a complex technical analysis tool. However, with the Advanced Elliott Wave, trading based on its principles becomes more effective and accurate. This Forex Trading will guide how to use Elliott Wave in trading, from basic understanding to specific strategies and risk management.
Overview of Advanced Elliott Wave
Before delving into Advanced Elliott Wave Theory, you need to understand the pattern fractals. Because it can be divided into smaller pieces.
Types of Elliott wave patterns
According to Elliott’s wave theory, the market moves in a series of waves that reflect fluctuations in the psychology and behavior of traders. Specifically, Elliott described that in a complete market cycle. You can recognize 8 waves in the main trend (5 extension waves and 3 correction waves). Among the corrective waves, 21 patterns exist, ranging from simple patterns to more complex patterns.
These corrective wave patterns are popular price structures. Especially, traders can use it to identify potential reversal points in the market. By understanding and applying these patterns, traders can spot attractive trading opportunities.
Zig-Zag Advanced Elliott Wave pattern (Zig-Zag Formation)
The Zigzag correction pattern is one of the fastest price movements. This is the opposite of the previous trend.
In this pattern, wave B is usually shorter than both waves A and C. Sometimes, a correction can consist of many consecutive zigzag patterns, even up to 3 times. Each zigzag pattern, similar to other wave patterns, can be divided into 5 smaller waves. Once completed, the Zigzag wave pattern can create a new trend.
Flat Elliott wave pattern (flat formation)
The flat wave pattern is a type of correction in which the price moves sideways. In this pattern, the waves are usually equal in width.
Furthermore, Wave B going in reverse relative to Wave A, and Wave C is in reverse relative to Wave B. However, sometimes Wave B can surpass the start of Wave A, creating a variation of the pattern This.
See more: Elliott wave principle help you trade Forex successful
Triangle Elliott wave pattern (triangle formation)
The triangle pattern is a scaled correction between two trend lines.
However, it may be converging or diverging. It is made up of 5 waves that go against the original trend. Moreover, it often takes place in a sideways situation. There are four common types of triangles: isosceles triangles, ascending triangles, descending triangles, and extended triangles.
Basic and advanced rules of Advanced Elliott Wave
The basic and advanced rules of the Advanced Elliott Wave are the key to success in financial trading. Understanding and applying them helps traders analyze the markets more accurately and effectively.
The most important basic rules for Advanced Elliott Wave counting
Elliott’s wave theory holds that the market moves in a series of waves. Strong impulse waves move in the direction of the main trend, while correction waves move in the opposite direction. In an uptrend, impulse waves are created from five waves that push prices higher. While in a downtrend, impulse waves push prices lower.
Each impulse wave is accompanied by a correction wave to adjust the “hot” price period. In which 3 waves move in the direction of the main trend and 2 waves move in the opposite direction. Then, a corrective wave is created from 3 individual waves. In which 2 waves move against the main trend and 1 wave moves in that direction. During a bearish cycle, the process happens in the opposite direction.
Golden rules of Elliott wave pattern
Advanced Elliott Wave has developed 4 “golden rules” to determine the existence of the Wave Principle:
Corrective wave 2 cannot decrease more than 100% of wave 1. For example, if a stock increases from $10 to $50, the corrective wave cannot be lower than $10.
Wave 3 cannot be the shortest of the three waves 1-3-5. Wave 4 cannot cross the peak area of wave 1. However, in modern Elliott and some special types of markets, this rule may not apply.
This means that wave 5 may or may not occur. if one of these 4 golden rules is not satisfied. We see that applying the Elliott Wave Principle to a certain trend should be stopped, and another trend should be sought.
If you want to use the Elliott Wave Principle in your trading. We find it very important to remember and comply with these rules. In doing so, you will quickly realize that most charts have waveforms of five and three.
What should you keep in mind before trading with Advanced Elliott Wave
Before trading with Advanced Elliott Wave, you need to note the following points:
- Understand the principles of the Elliott Wave: Make sure you have mastered the basic principles of the Elliott Wave. This includes its wave structure, rules, and patterns.
- Practice and test your strategy: Before applying it to real trading, test your strategy on historical data. From there to ensure efficiency and reliability.
- Use additional technical tools: Combine Elliott Wave with other technical tools such as alarm indicators. Include moving averages, or candlestick charts to increase prediction accuracy.
- Risk management: Always have a risk management plan when trading. You should use stop-loss and take-profit. The result is to protect capital and cut losses when the market does not perform as predicted.
- Follow the news: The market is always changing. So continue to improve your knowledge and update the latest information about Elliott Wave. There are also other market factors.
The difference between classic Elliott waves and modern Elliott waves
In classic Elliott wave theory, there is often a tendency that wave three will be the longest wave in the cycle. However, in modern Elliott, due to the expansion of several financial markets such as Crypto and gold. This attracts a large number of new investors to participate. This leads to an increase in cash flow into the market.
As a result, wave 5 in the cycle tends to be the longest. Professional traders, often start trading at wave 3 of Elliott. When the market often has strong fluctuations and the highest profit potential. After that, they began to sell slowly following the 5 Elliott wave, when the market gradually reached its peak and showed signs of correction. This helps them optimize profits and minimize risks during trading.
What are the mistakes to avoid when trading with Advanced Elliott Wave?
When trading with Advanced Elliott Wave, the important point is that we cannot know exactly. The time when the corrective wave has ended. A common mistake is to try to guess that it is wave 2 when the price corrects to the Fibo zone in wave 1. However, according to the rule, if wave 2 does not decrease more than 100% of wave 1, the result can be close. close to the bottom of wave 1 and then increased unexpectedly.
Don’t try to predict when the wave will end when trading Elliott waves. Another mistake is trying to draw Elliott waves subjectively, without any basis. Don’t try to predict the price path when we haven’t seen waves 1 and 2 yet. Similarly, to know when the market corrects, we also need to know when wave 5 ends.
When using Elliott Waves to trade, you need to have the right mindset. Elliott wave is not an entry signal but a theory to combine with other tools more effectively. It requires us to use indicators to confirm trends or use Elliott waves as a tool to plan trades properly.
Instructions on how to trade according to Elliott waves
Wave 2 of the Elliott wave usually ends in the 50-61.8 Fibo zone. Then, to determine the take profit point or the next entry point, Fibonacci extensions can be used. When the price goes above wave 1 and closes above this price range. Entering orders at this time will be much safer.
This is the simplest way to measure Elliott waves. There is no method other than determining the take-profit point when using the Fibonacci extension. Once again, Fibonacci comes into play when the price hits the 1.618% Fibo extension zone and corrects into wave 4.
Instructions on how to trade according to Elliott and Fibonacci waves
Fibonacci, with its magical number sequence, pairs perfectly with the Advanced Elliott Wave theory. The most important Fibonacci indicators for trading with Elliott Waves are 50%, 61.8%, and 161.8%.
How to enter orders with Fibonacci in Elliott wave combinations as follows:
When wave 2 begins to correct to the 50-61.8% Fibo zone of wave 1, we often see a potential entry point. However, to increase your chances of winning, you should wait for the trading price to be in the price range above Wave 1. If you want to take a risk, traders can consider buying 1/2 the normal volume.
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Elliott wave trading guide combining Dow theory and RSI indicator
As mentioned above, it is very important to only trade Elliott waves when the market begins to enter wave 3. Because wave 3 is usually the longest and occurs fastest in the cycle. However, to identify Wave 3, we need to make sure that Wave 2 has been completed (when the price started trading above Wave 1). Below is how to apply Dow theory and multi-timeframe analysis. Furthermore, use the RSI to trade Elliott waves through a real-life example.
Step 1:
Suppose you predict right from this position that wave 2 will end and start buying. However, this has no definite basis. Here, zoom into smaller time frames and look for a change in structure. This will help us predict earlier when wave 2 will end, and this is a way to significantly increase the likelihood of accuracy.
Step 2:
From there, combined with the RSI indicator, it shows overbought and creates a divergence. At this time, there is more basis to predict that wave 2 has ended.
Step 3:
Continuing back to time frame D, although the price has not yet escaped wave 1, we can still enter an order here. If we follow Elliott wave theory, wave 3 will usually extend to the 1.618 Fibo zone. This will be our goal, instead of having to lock in the old high and wait for a breakout before continuing.
Step 4:
Finally, the results show that the waves travel very accurately according to Elliott’s theory. Especially when touching the 1.618 extended Fibo zone and starting to adjust. Because you should only trade in wave three. Because we will temporarily not pay attention to this pair until it starts a new cycle.
Conclude
So in this article, Forex Trading has explained what the Elliott wave theory is. From there you can understand the basic principles of operation and how to count and determine market trends. If you see this article analyzing Advanced Elliott Wave from A to Z, please support Forex Trading by sharing this article.
FAQ
How many types of waves are there in Elliott’s theory and how are they identified?
Elliott’s theory includes 8 types of waves. Includes 5 waves for the main trend and 3 waves for the opposite correction. These waves are numbered from 1 to 5 for bullish waves and from A to C for bearish waves.
How to determine the ending point of a wave in Elliott waves?
The endpoint of a wave is often determined. By using various technical indicators such as support and resistance lines. Furthermore, there is the RSI (strong and weak index), MACD (Moving Average), and price pattern.
What are the characteristics of waves in an uptrend?
In an uptrend, waves 1 and 2 are usually strong and fast. Wave 3 is the strongest and usually lasts several times longer than waves 1 and 2. Wave 4 is usually a correction and wave 5 is usually the last wave with strength. However, there may be signs of weakness.
