The Elliott Wave Theory

The Elliott Wave Theory can be used as form of technical analysis when Forex trading. It helps to identify long term trading patterns based on trader sentiment and the psychology of group behaviour. Elliott Wave is focused on market behaviour and identifies wave patterns, each having its own characteristics and divided between impulse and correctional waves.

There are two forms of waves, impulse and corrective. An impulse wave moves in the direction of a longer trend whereas corrective move against the trend. Being able to identify current market sentiment and where it sits within a trading pattern, allows traders to predict the forthcoming wave I.e., impulse or corrective.

Elliott Wave theory is one of the most widely used techniques when completing technical analysis. Large financial institutions along with speculative traders use the theory when determining future price movement. Due to is popularity, it is safe to say that Elliott Wave theory does provide traders with accurate predictions, only if it is used correctly!

Counting waves is a major component in applying Elliott Wave to Forex trading. There are very specific rules to counting both impulse and corrective waves and if these are not followed, it will lead to an incorrect interpretation of the wave structure.

It is important to remember that Elliott Wave may be considered a reliable indicator, however, like every other technical tool, it is not an exact science.

The Elliott Wave theory was developed using various indices, but the theory is centred around group behaviour and market sentiment. The underlying principles of the theory are transferrable to Forex trading and every online broker will have Elliott Wave technical indicators in the tools available to the trader.

Elliot Wave theory is fractal, this means that it can be used on any time frame.

The wave theory breaks group behaviour into wave patterns known as impulse and corrective waves. An impulse wave will consist of five waves in the direction of the trend and will be followed by a corrective three wave in the opposite direction. Each impulse wave will be formed of a smaller five pattern and each corrective wave will consist of a smaller three wave pattern.

The fractal nature allows a trader to identify where market sentiment sits within a larger time frame.

Wave three in an impulse wave is always the biggest and has the most momentum. This means that getting in early on wave three is the big-ticket ride. During this period prices rise rapidly, and volume of trading is extremely high. Wave 3 is where much of the public concede that the previous bear trend is well and truly over and exit their positions to trade in the new emerging trend. Wave 3 generally extends around 1.618 times the size of wave 1.