**Elliott Wave** carries important meanings about the structure of the cycle as well as the price trend. This is also one of the important concepts of waves that investors need to understand. This will help investors predict how the market will move next. At the same time, clearly determine which stage of a price cycle the market is in. Let’s join** Forex Trading** to learn details about the **Elliott wave** right now!

**What is the specific definition of the Elliott wave and Elliott wave theory?**

Whenever we talk about technical analysis, we cannot help but mention **Dow Theory**. All formations of basic principles are based on this theory. In particular, the **Elliott wave** also has many similarities with the Dow theory. Let’s find out.

**Concept of Elliott wave when trading Forex**

Mr. Ralph Nelson Elliott is the person who created the theory of the **Elliott wave**. This technical analysis method is applied based on price patterns of trading sessions. Based on many years of statistics, observation, and analysis of historical financial market data. This theory concluded that the market has a cyclical repeating wave pattern. And the principle **Elliott wave **is understood as the behavior of investor groups, the psychology of conversion. They will then form wave patterns.

This phenomenon is most clearly shown in price fluctuations and trading volume. Elliott distinguishes 11 wave patterns with specific names and chart patterns. Investors and traders can use this theory as an analytical tool to help identify cycles as well as predict market trends.

**Brief overview of the principle/theory of Elliott wave**

In 1985, the book “The **Elliott Wave **Principle ” was published for the first time and widely published on the market. According to the principle, the most basic wave model will be divided into 5 wave phases. It includes 3 trend waves and 2 correction waves. Trend waves include waves 1,3,5 and correction waves 2,4.

Rising and falling waves will alternate. To put it simply, an up wave will be followed by a down wave and vice versa. Each wave cycle will include 8 waves. An uptrend includes 3 upward waves, waves 1,3,5, and 2 downward waves, 2 and 4. A corrective trend will consist of 2 down waves A and C and 1 up wave N.

There are some outstanding rules when trading waves that investors need to keep in mind. First, wave 4 will not encroach on wave 1. Wave 2 will not be able to fully retrace wave 1. Finally, waves 1,3,5, wave 3 is the strongest rising wave.

**Elliott wave patterns are popular among investors**

As analysts learn, the wave pattern has two main characteristics. They reflect the psychology of the crowd in investing and the waves are cyclical.

**Basic Elliott wave model group that investors should know**

Elliott includes two basic models: momentum waves and correction waves. Understanding each wave model will help investors apply analysis more conveniently.

**The Elliott wave model is a driving force that investors should know**

In the Impulse Wave model, it is divided into 5 small waves. Wave 1, is the first wave and is often unclear. When the bull market first started, most of the news was negative. Currently, the price is mainly falling, but the volume may increase slightly when the price increase is not enough.

Wave 2 improved compared to wave 1, but did not surpass the starting point of wave 1. Currently, the news is still bad but there are some positive signs. But the retracement volume of wave 2 compared to wave 1 is usually at most 61.8%.

Wave 3 is usually the largest and strongest wave in a trend. Wave 3 usually extends wave 1 with a ratio of 1.618:1. During this time there is a lot of positive news, the price will increase rapidly. Compared to wave 3, wave 4 will correct more clearly and the trading volume will also be lower. Wave 5 is usually the last wave of the cycle.

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**Corrective Wave Model of Elliott Wave**

The Corrective Wave includes 3 small waves inside. Wave A will often be more difficult to identify than the other waves. In the Bear Trap market, if positive signals are still present and selling volume is still increasing, wave B price reversal will be higher. However, the trading volume in Wave B may be lower than in Wave A. When wave C appears, the price will move from strong to low in wave 5. And wave C is often equivalent to wave A.

**Advanced Elliott wave model group that investors need to know**

In addition to the structures of basic waves, in reality, dynamic and corrective waves are much more complex. Considering each form separately, each wave will include 5 small waves inside. Each correction wave will consist of 3 small waves. In total, each wave will have 8 small waves.

**What is an extended Elliott wave pattern?**

Each of the three waves 1,3,5 has the potential to become an extended wave. Investors should note that each extended wave pattern can only open one wave. Usually, the extended wave will be wave 3. Then waves 1 and 5 will follow the basic wave structure principle. The expanding wave pattern will have the structure of a basic dynamic wave pattern.

**Refer to the diagonal triangle Elliott wave pattern and the truncated wave 5 pattern**

The diagonal triangle wave pattern is a bit different from other wave patterns. They are connected by peaks and troughs at different wavelengths to draw trend lines. From this trend line, a triangle is formed.

The truncated wave pattern 5 is a dynamic wave pattern. Wave 5 will not be allowed to surpass wave 3. In some cases, wave 5 will still surpass Wave 3 but not too significantly. Basically, the other waves will all follow the basic structure of each wave pattern.

**How are the Zigzag and Flat Wave Elliott wave patterns displayed?**

The structure of the Zigzag wave will often look like 5-3-5. Zigzag waves will mainly appear in the 2nd wave. In the case of the 2nd sideways wave, the Zigzag wave may appear in wave 4. The Zigzag wave pattern will have the ability to expand into a Double Zigzag or Triple Zigzag form. With these variations, the wave pattern will be intersected by a corrective wave called wave X. Wave X will often have a structure of 5-3-5 and be shorter than a single Zigzag wave.

The Flag wave pattern is recognized by two parallel trend lines. With this type of wave pattern, the waves inside will be of equal length. The structure of the Flag wave is 3-3-5 or 3-3-7. In the Flag wave pattern, wave A and wave B will be two corrective waves. Wave C will have the structure of a comb dynamic pattern. The correction of Wave B will be 61.8% greater than wave A. If wave B has a correction of less than or equal to 100%. At this time, the lengths of wave A and wave C will be equal. Normally, the flat wave pattern will appear in waves 2 and 4.

**Analysis of the specific structure of Elliott wave**

The most complete wave cycle will include 8 sub-waves and a 5-3 structure. Simply put, the first phase of the wave will consist of 5 waves moving in the main trend. The second phase will consist of 3 tuning wavelengths moving in the opposite direction compared to the main direction. The 3 tuning wavelengths will be marked with the letters A, B, and C.

Each bullish phase will consist of 5 waves marked from 1 to 5. This is an impulse wave pattern or also an Impulse wave. These include waves 1,3,5 which are up waves and waves 2,4 which are down waves. A down phase will consist of 3 waves A, B, and C, which are 3 corrective waves. Waves A and C are bearish, while wave B is bullish.

For the structure of the wave cycle in an uptrend, the impulse wave must be a bullish phase. If it is a corrective wave pattern, it will be a bearish phase. Conversely, in a downtrend, the impulse wave is the decreasing phase and the corrective wave is the increasing phase.

**5 ways to help you improve your trading efficiency according to Elliott wave**

Trading according to **Elliott Wave** is not difficult. However, investors are required to have methodical trading methods. Besides, I to fluently use waves and technical analysis. Investors can also combine other indicators to increase recognition. Some indicators that investors can refer to are RSI, Fibonacci, **average line**, MACD,…

**Identify market trends through the Elliott wave model**

With the principle of the **Elliott wave**, investors will be provided with an overview of the trend through dynamic wave models. If the chart shows all five rising waves. This shows investors that the market is in an uptrend. And vice versa, if those five waves are decreasing, this is a signal that the market is in a downtrend.

Investors can also combine the use of MA lines to more specifically determine the market trend. If the market is in an uptrend, the price will be above the MA line. If the market is in a downtrend, the price will be below the MA line. Confirming the market trend is important so investors can apply waves when trading.

**Correctly recognize counter-trend price movements thanks to Elliott wave**

“Counter-trend movements occur in three waves” The wave 3 pattern is a corrective reaction to the previous impulse wave. Knowing that the current move is just a correction in the main trend is very important information for investors. This correction gives them the opportunity to add to trading positions in the direction of the main trend.

There are three main corrective wave patterns: Zigzag waves, triangle waves, and flat waves. They allow investors to buy during upward trend corrections. And then can sell during temporary bearish rallies. This is a strategy that has proven to have a pretty good success rate. Furthermore, knowing how counter-trend moves play out is an advantage that can help investors find opportunities to participate in the main trend.

**Elliott Wave shows the possibility of a trend reversal**

Wave patterns are the repetition of large structures with small structures within. The repetition of these wave structures is a geometric property of price movements.

Look at the picture above, wave 1 has been divided into 5 small waves. However, there is only 1 part of the 5 big wave patterns. This is a signal that the trend is about to reverse. Let’s take an example if the price rises to wave 5. There are 5 waves and waves 3 and 4 have been completed. Investors should remember that this is not the time to place buy orders. At this time, close the order or set a stop loss to ensure profit for yourself.

The wave principle also tells investors when a major trend continues. If the correction has 3 ABC waves and the price cuts the peak of wave B, the main trend may have begun to recover.

**The Elliott wave model helps investors find price targets**

This is a difference in waves that investors can apply. We all know that the **Elliott Wave** and the Fibonacci sequence are closely linked to each other. The Fibonacci sequence is the mathematical foundation of the wave principle.

The better the Fibo ratio when counting waves, the higher the accuracy of the wave. In fact, during the analysis, researchers discovered that the main wave structure is an internal structure consisting of motive waves and corrective waves. And the waves are usually aligned in the 2.618 Fibo ratio; 1618; 0.618;…

Based on the Fibonacci sequence, waves can explain why there are increases or decreases in the market through repeating patterns. Corrective waves will usually retrace at 61.8, 38.2, or 50% of the impulse wave. These are all the most beautiful reversal points for investors to apply when trading.

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**Recognize the point of the model having no value more clearly thanks to the Elliott wave model**

Based on waves, investors can completely identify patterns that are no longer valid on the chart. Simply put, these wave models are no longer suitable for the current wave counting method. This will help investors recognize mistakes and change the wave counting method to be more appropriate.

To count waves and trade waves best, investors can identify wave cycles. In particular, waves 3, 5, A, and C are considered periods that create many profitable trading opportunities. Investors can buy when the market rises and then sell when the market falls. This can bring higher profits to investors.

These waves occur in the main direction of the market trend. In particular, waves 3 and 5 of the cycle are considered the longest, so they create potential opportunities to take profits when trading. However, an adjustment cycle can still occur. If it is discovered that this model and wave counting steps are not suitable. Investors can wait for the momentum wave model and start counting new waves.

**Conclude**

Hopefully, the information that **Forex Trading** shares about the **Elliott wave** will help investors better understand the principle of this wave. However, investors should note that the nature of waves is not a technical analysis tool. When using waves, investors need to pay attention to combining them with other indicators related to movement and trend determination. This will help investors get more specific and accurate information. So what are you waiting for? Apply the wave principle to create a trading strategy right away.

**FAQs**

**In the wave principle, which wave is best to use for trading?**

In fact, there is no one wave that is considered the best. However, when investors trade with waves 3,5, A, and C, they will create more advantages.

**Which indicator should you combine using wave 5 with?**

Investors can combine wave 5 with MACD or Stochastic. It will help investors more accurately predict signs of divergence.

**Which wave’s period is considered the longest?**

Waves 3 and 5 are considered the two waves with the longest cycle because they create the most potential opportunities.