Know all about Elliott Wave in Forex Trading

Know all about Elliott Wave in Forex Trading 

In the early 1920s, Ralph Nelson Elliott, a professional accountant, observed that stock markets followed predictable patterns rather than fluctuating unpredictably. 

According to him, the market trade-in repeatable cycles attributed to investors’ emotions influenced by outside factors or most of the general public’s psychology at the time.

He was sure to say that these patterns do not guarantee future price movement but rather assist in sorting out the possibilities for future market activity.

Forex market and its price activity

The world’s most prominent independent financial research and market forecasting organization, Elliott Wave International, adopted Elliott’s model in its market analysis.

We have always heard that “to every action, there’s always an opposite and equal reaction” same goes with the financial market and its price activity. 

If the price of EUR/USD increases, for example, you may notice more individuals selling gold than expected. However, if the price of EUR/USD drops, you may see that people purchase more gold than average.

Principle of Elliot waves

The Elliott Wave principle is composed of two waves.

Impulse Waves

It is a steady movement in one direction. So, while each bar might move up or down, the price is slanted in one direction overall.

Corrective waves

A corrective wave is a lesser movement that happens in the reverse direction of the impulse. Like other motive waves, its purpose is to drive the market toward the trend.

Elliott waves functions

Applying Elliott Wave Theory, several technical analysts aim to benefit from stock market wave patterns. According to this theory, stock price changes may be forecast because they follow a pattern of up-and-down waves caused by an investor’s behavior or mood.

Motive waves (also called impulse waves) and corrective waves are the two types of waves identified by the theory. It’s subjective, which means that not all traders will understand the idea in the same manner or think it’s a good trading technique. However, impulsive and corrective waves create the price structure that can be seen on our charts. 

It occurs in all markets and in all time frames. They assist us in determining trend direction detecting reversals. They may be utilized on a micro-scale to identify when the trend is wearing out (before reversal) or when a pullback is stalling out, and the price is ready to resume moving on the broader trending direction.

Three irreversible rules define Impulse waves formation

  • First, wave two cannot exceed a 100 percent retracement of the preceding wave.
  • The third wave will never be shorter than the first, third, and fifth waves.
  • Wave four can never reach beyond the third wave.
  • If the trader breach any of these principles, the structure is no longer an impulse wave.

Elliott Wave theory application

Elliott wave theory suggests that the market moves in five patterns.

  • A three-way decrease will follow a five-way increase in an upward trend. Conversely, a three-way increase will follow a five-way collapse in a negative trend. 
  • The five-way patterns are known as ‘impulse waves,’ while the three-way patterns are known as ‘corrective waves.’
  • The price rise in the ‘impulsive wave’ is in phase one of the uptrend. Therefore, the investors interpret the trend to reverse, resulting in a negative pricing denominator.
  • Prices do not decline significantly in wave two. However, the trend begins to rise in wave three, bringing good news into the market.
  • On wave four, prices fall due to profit-booking, leading to an objective standpoint from investors who get favorable market news.

Bottom line 

Forex trading is amongst the most confusing yet lucrative fields. Once you have learned to identify impulsive and corrective market swings, you will be able to increase the probability of your trades while also identifying essential market features.

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