Find out what are Elliott waves. Join Forex Trading to explore Elliott wave models and Elliott wave principles in the article below to optimally apply in transactions. At the same time, make transactions simpler, more effective, and more successful!
Learn and introduce in general what are Elliott waves.
What are Elliott waves? This article will share related knowledge for investors to refer to and apply in investing.
Elliott wave concept
Elliott Wave is a technical analysis tool used by investors in researching market prices of commodities, cryptocurrencies, etc.
Elliott waves analyze price movements and these movements tend to repeat and create waves. Thanks to the review of previous trading data and the application of Elliott wave principles. Investors can predict further price movements based on market sentiment.
Elliott Wave was developed by Ralph Nelson Elliott – an American Accountant in 1930. After a period of research and data analysis. He realized that the market does not fluctuate uncontrollably but follows a number of repeating rules and cycles.
What are Elliott waves?
Elliott waves have two main natures:
- One is based on natural laws.
- Second is the attempt to model crowd psychology
See more: Elliott wave principle help you trade Forex successful
Current Elliott wave model
First, the impulse wave pattern consists of 5 small waves: waves 1,2,3,4,5. In particular, there are 3 rising waves: waves 1, 3, 5, and 2 falling waves: waves 2, 4.
Second, the ABC correction pattern consists of 3 ABC waves.
After the 5 impulse waves end, a corrective cycle begins with at least 3 bearish waves (ABC). The correction process can be more complicated depending on the structure of the wave. Note some corrective cycles can delay more than 3 waves.
According to Elliott, there are 21 corrective wave models, including the following 3 models:
- Zig-Zag pattern
The Zig-Zag pattern is a corrective waveform and is a steep movement in price. It moves in the opposite direction compared to the previous trend. Wave B is usually the shortest wave compared to wave A and wave C, and wave B cannot return to the starting point with wave A.
- Flat model
Flat waves are a variation of corrective waves. Here the wave widths are usually equivalent. Wave B reverses against wave A and wave C reverses against B. However, sometimes wave B can still surpass the starting point of wave A.
- Triangle model
The Triangle wave is another type of corrective wave pattern that has 5 waves. It is a correction accompanied by two trend lines that are either converging or diverging. The triangle consists of 5 waves that go against the starting trend and are in a sideways state.
How to apply the Elliott wave model
Besides learning what are elliott waves, and what is Elliott wave theory, traders also need to learn the principles and ways to apply the model in trading.
Trends what are Elliott waves?
During the impulse wave phase, there is usually a 5-wave structure. Therefore, when you see an increasing or decreasing period with a small 5-wave structure inside, then you can clearly understand the trend of that market.
Identify the internal reversal zone what are Elliott waves?
After identifying a trend with 5 wave sequences, traders can wait for the major correction period to appear and end. Usually, the correction phase ends near the 50% and 61.8% levels of the Fibonacci Retracement range. In case there is a strong and steep rising wave, the 38.2% level will be the level where a correction occurs and creates the ideal bottom point for the price. From there, investors can monitor fluctuations in this area before making investment decisions.
How to effectively use what are Elliott waves in trading?
If traders want to have good results and success in their transactions. Read the information below immediately to know how to apply it effectively in trading.
Instructions for applying the Elliott wave rule
Applying important rules will help investors apply Elliott waves accurately and effectively. The main rules of Elliott waves are:
- Wave 2 does not decrease too much compared to the peak of wave 1.
- Wave 3 is not shorter than wave 1 or wave 5.
- Wave 4 is not allowed to penetrate the price area of wave 1.
- Waves 2 and 4 often have different shapes. If wave 2 is a steady decline, then wave 4 may be the next decline.
- Waves 1, 3, and 5 are considered “strong” waves, while waves 2 and 4 are considered “weak” waves.
- Waves 2 and 4 have similar slopes. If wave 2 has a slight slope, then wave 4 is a low slope.
These rules help traders clearly see the waves in the market and make appropriate trading decisions.
How to apply the Elliott wave principle
Here are 5 ways to apply the Elliott wave principle:
Method 1: Correctly identify the main direction of the market
To determine the main trend of the market, we rely on the dynamic model (5 waves). If 5 waves show an increase, then the main trend is bullish. On the contrary, if 5 waves are down, the main trend is down. This helps investors easily choose transactions.
Method 2: Identify counter-trend price movements
The 3-wave pattern represents a correction from the previous impulse wave. Recognize that the current movement is a correction in the primary trend. That is an advantage for all financial markets because prices always increase and decrease according to major cycles.
Method 3: Identify if the trend is likely to reverse
So how to identify a possible trend reversal What are Elliott waves? The large structures of Elliott waves are made up of smaller structures linked together. In wave 1, 5 smaller waves may be included, but this is only part of a larger 5-wave pattern. Specifically, when the price has increased and has completed a number of previous small waves, investors understand that this is not the right time to buy anymore. Besides, we also prepare for the possibility of a reversal that may occur at the end of wave 5.
See more: Broker XM: Explore the world of Forex fingertips
Method 4: Add price targets
A special feature of Elliott’s theory is the use of the Fibonacci number sequence as a basis to create the wave principle. The Fibonacci number ratio is related to both impulse and correction waves.
Usually, corrective waves will gradually decrease to 61.8%, 38.2%, or 50% compared to the impulse wave. These are the times when investors can easily identify the best reversal points to trade.
Method 5: Identify “Invalid Model Points”.
Based on the knowledge of Elliott waves, traders can analyze and identify specific “points of invalid pattern”, that is, the price level where Elliott wave counting is no longer accurate.
Conclude:
So, the above article has told you what are Elliott waves. Based on the model and principles of Elliott Wave in the article of Forex Trading. This method will help investors and traders understand and predict price fluctuations according to a specific cycle. Please follow the upcoming article to learn more about investment knowledge and achieve success in investment activities.
FAQs
What is the relationship of the Elliott and Fibonacci waves?
It can be seen that the connection between Elliott waves and Fibonacci is a profound connection, recognized by many experts as scientifically integrated. Elliott waves provide a framework for the market, while the Fibonacci ratio serves as a measuring tool not only for the range of price movements but also for their duration.
Which wave is considered the best wave to trade?
Wave cycles, especially waves 3, 5, A, and C, are considered the most favorable times to enter trading because they often create many profit opportunities.
Which wave is considered the final phase in the main trend?
The wave that is considered the final stage in the main trend is wave 5 Elliott.
