Explaining The Elliot Wave Principle

The Forex market looks like total chaos. The term volatility doesn't do it justice. It's almost impossible to make sense of it right away before you know anything about it. Luckily, there are some very smart people in the world who over the years and decades have discerned specific patterns in the Forex market - patterns you can use to not only make sense of what's happening, but to find opportunities to make a profit by buying and selling. One such method for this is known as the Elliot Wave principle.

SO ELLIOT WAVES ARE WHAT EXACTLY?

Elliot Waves are something we'll talk in more detail shortly about what they are specifically, but basically they're price fluctuation patters of a specific kind. The general idea is that markets move in predictable patterns, based on the idea of the mood of investors. Trends move in specific ways and change direction in specific ways as investors jump on or off of them in known patterns. Elliot Waves are representations of these patterns over any time interval, allowing the market to be somewhat predictable.

ELLIOT WAVE HISTORY

An account named Ralph Nelson Elliot formulated the Elliot Wave theory in a 1938 book called The Wave Principle. He was able to use his theory originally to make predictions for the behaviour of stock markets, but it turned out that the Elliot Wave principle actually applied to anything involving the psychology of large groups of people. Even fashion trends and popular fads could be seen to follow his Wave theory. They're perfect for analyzing Forex - a large, complex system involving massive amounts of people.

HOW DO ELLIOT WAVES WORK?

The two types of waves in the Elliot Wave principle - impulsive waves and corrective waves. Impulsive waves impel market trends. Corrective waves, as you would imagine, supply corrections to those impulses. They have to work a specific way to be Elliot Waves. They appear in every time frame.

THE WAVES

There is the dominant trend, consisting of five waves, and the corrective trend, consisting of three waves. They go up and then down in a bullish market, and down and then up in a bearish market. The first wave (Wave 1) is impulsive. The second wave (Wave 2) is corrective, but never to the point that it passes where Wave 1 started from. Wave 3 is impulsive and often the biggest wave of all. It's way past Wave 1. The fourth wave (Wave 4) is again a corrective wave, but not does not overlap with Wave 1. The fifth wave (Wave 5) is the final part of the dominant trend. This is where the overall trend starts reversing direction. The sixth wave (Wave A) is the first part of the corrective trend - a correction that starts the overall trend moving in the opposite direction. The seventh wave (Wave B) is the last impulsive wave, actually a correction of a correction, it's a temporary reversal. The eighth and final wave (Wave C), which is the final correction of the overall trend. It's usually even bigger than Wave A. The waves consist of their own waves following a similar pattern. This corresponds with the idea that they're fractal in nature.

WHAT CAN YOU DO WITH ELLIOT WAVES?

You can use Elliot Waves to help determine when to get into or out of a trend. Don't think of them as sorcery that can predict the future for you every time. But they're still an invaluable tool for any trader.