Elliot Wave Theory in Forex helps traders to identify patterns in the trending market price charts & predict where price will go next.
Elliot Wave Theory was developed by a business expert accountant trader Mr. Ralph Nelson Elliot.
In 1930’s, he was forced to retire due to a serious illness. Despite of his illness, Nelson Elliot did not give up on his dream.
Therefore he spent most of his time studying and observing stock markets and their charts with a hope of understanding the market behavior.
Elliott believed that stock markets thought to behave in a somewhat random and chaotic manner, in fact, traded in repetitive patterns
And so, from his analysis while studying stock market charts of 75 years, Elliot concluded that the market is not rational. This same theory is applied in any other financial market analysis including forex.
The market trends and patterns
Elliot therefore ruled out that the continuous change in stock market prices is due to the basic harmony found in nature.
He discovered that, the trends and reverse patterns occurred in a repetitive form on the charts.
Elliot simply explained the happenings that people rarely change their behavior. They tend to behave the same over and over regardless of the news and most dependable events. He went further to illustrate these patterns and named them waves.
In his theory, he shows that traders can identify the patterns in the trending market price charts and predict where price will go next.
He then further described how these patterns can be linked together to form larger versions of the same patterns.
Small patterns form large patterns then larger; the process is continuous till the next largest size but identical.
Smaller Waves (I), (II), (III), (IV) and (V) form an impulse, and waves (a), (b) and (c) form a correction.
The five-wave impulse, in turn, forms wave 1,2,3,4,5 at the next-largest degree, and the three-wave correction forms wave A,B,C at the next-largest degree.
Why you should trade the elliot wave theory in forex
The Elliot wave theory in forex helps investors, and traders to know how the market behaves from the point of pessimism to the point of optimism. These are changes in human psychological orientation.
This makes it easy for traders to identify potential areas where price is most likely to reverse.
That was awesome; finally things were made right. You just have to look for only two points; weak and strong.
From his judgments, behind every success, there is always a weakness at the beginning which may be fear or doubt. True or false? All this defines the Elliot Wave Theory.
The basics of the Elliot wave theory.
Elliot observed and noted the power struggles in the market caused by the market participants.
As the market progresses, price tries to find its trend but never fails to meet struggles that sometimes make it divert from its direction.
He therefore named this kind of zigzag or up and down movement A wave.
Then he concluded that this kind of behavior appears in 2 different forms on a market chart;
- The Impulsive move
- The Corrective move.
From the illustration above,
Waves 1, 2, 3, 4 and 5 form an impulsive move, and waves A, B and C form a correction move.
We shall look at Impulsive move and the correction move in details in our next lesson. just click next below
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