What are Elliott waves? It is a technical analysis method used in financial investing. Its principle involves analyzing and identifying wave patterns on price charts. In this article, we will share the Elliott wave theory so investors can refer to and apply it during the investment process. Let’s follow and explore details with Forex Trading.
What are the fundamentals of Elliott waves?
Elliott Wave has its principles, investors can apply them in technical analysis. This principle is based on the idea that financial markets follow specific patterns.
According to Elliott wave theory (EWT), crowd psychology considers market movements a series of natural cycles. Models are created based on current market sentiment. They alternate between bearish and bullish periods.
The Elliott wave principle was created by Ralph Nelson Elliot in the 30s. It was only in the 70s that this theory became popular thanks to Robert R. Prechter and AJ Frost.
Originally, EWT was called the “Wave Principle” and was used to describe human behavior. Elliott laid the foundation for his creation through thorough research of market data.
See more: Elliott wave principle help you trade Forex successful
Basic Elliott wave model that traders need to remember
Typically, the basic Elliott wave pattern can be identified through an eight-wave pattern. Consists of five waves moving in the main trend and three corrective waves moving in the opposite direction. However, below Forex Trading will point out the two most basic and popular types of waves. Let’s follow the wave models through the content below.
Elliott wave movement
Moving waves always move in the direction of the larger trend. Elliott described two types of wave development, which are moving waves and corrective waves. The previous example involved five moving waves and three corrective waves.
However, if we go into detail, a moving wave will contain within it a structure of five smaller waves:
- Wave 2 cannot exceed a 100% retracement of the previous wave 1 movement.
- Wave 4 cannot exceed a 100% retracement of the previous wave 3 movement.
- Among waves 1, 3, and 5, wave 3 cannot be the shortest and is usually the longest. Furthermore, wave 3 always passes through the bottom of wave 1.
Elliott wave correction
Unlike moving waves, corrective waves often have a three-wave structure. This type of wave usually forms from a small correction between two larger moving waves. These three Elliott waves will often be referred to as A, B, and C. Corrective waves tend to be smaller than campaign waves. Because they go against the larger trend.
In some cases, such counter-trend properties make identifying corrective waves much more difficult. Because they can vary significantly in length and complexity. The most important rule to remember about corrections is that they are never formed from five waves.
Elliott Wave Theory and How It Works
There is currently an ongoing debate about the effectiveness of Elliott waves. Some people believe that Elliott’s success depends on the trader’s ability. Occurs in correctly identifying market movements into trends and corrective directions.
As it turns out, waves can be plotted in many ways without breaking the rules of Elliott’s wave theory. This means that drawing waves accurately is not always simple. This depends not only on practical experience but also on a high degree of subjectivity.
In addition, the Elliott wave is not a tool to accurately predict all market movements. However, it does provide a way to understand the structure and behavior of prices over a certain period. Understanding it can help traders recognize potential trading opportunities and manage risks.
See more: Together XM Forex: Master the game, increase income
Practical application of Elliott wave theory in Forex trading
To apply Elliott’s wave theory to financial trading, you need understanding. Here are some ways you can use in your trading strategy:
Identify the main trend through Elliott wave theory
Elliott waves are often used to determine the main trend of the market. By identifying key waves, you can identify bullish and bearish waves. This helps you find corresponding buying or selling opportunities.
Determine the entry point when trading according to Elliott waves
A correction wave will often appear after a closing wave. It represents temporary adjustment points in the trend. By recognizing correction waves, you can look for potential entry points. At this point, the price has adjusted and is likely to return to the main trend.
Determine stop-loss and take-profit levels using Elliott
Elliott Waves provide a specific timeframe for bullish and bearish waves. Using this information, you can know the stop-loss levels. Take-profit is based on the expectation of the length of the waves in the trend.
Combine Elliott wave theory with a few other indicators
Elliott Wave can be combined with other indicators and technical analysis tools. These include Moving Averages, RSI, or MACD. From there provide further confirmation for your trading decisions.
Comply with risk management principles when trading according to Elliott waves
Risk is an inevitable part of forex trading. When using advanced elliott wave, it is no exception. It is best to set a stop-loss level to protect your invested capital and follow your risk management.
Note: Using Elliott waves can be complex and requires time and experience to develop skills in applying it to trading. Let’s test the strategy on a demo account. Only now will you have experience before applying it to real trading.
Epilogue:
Forex Trading has shared with you details about the Elliott wave theory. Hopefully, through this article, you will better understand Elliott waves and know how to apply them in practice. To use Elliott waves, learn a lot from experience. At the same time, don’t forget to use other technical indicators to make more accurate trading decisions.
Frequently asked questions:
Is Elliott Wave a technical indicator?
As mentioned, the Elliott wave is a technical indicator in the technical analysis of financial markets. It is based on the idea that the price of an asset moves in wave cycles, which can be analyzed to predict the next direction of the price.
How to identify Elliott waves?
To identify Elliott waves, you need to determine the main trend of the market > determine the length of each wave > use Elliott wave rules > check the wave pattern > and confirm with other indicators such as MACD, RSI, or moving average. By following these steps, you can smoothly trade Elliott waves.
Is it difficult to apply Elliott wave theory in practice?
Applying Elliott’s wave theory in practice can require a deep level of understanding of how it works and takes time and experience. For new traders, this is quite complicated.
