Elliot Waves – What Are Elliot Waves?

The Forex market on first glance looks extremely chaotic. It’s extremely volatile, with many price fluctuations in either direction, over and over again. It can be very daunting to jump into the Forex market without any idea of what you’re doing, and try to make sense of what you’re looking at. 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

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WHAT ARE ELLIOT WAVES?

Elliot Waves are waves of price fluctuations on a financial market that follow a specific pattern, which I’ll tell you about in a minute. The general idea is that markets move in predictable patterns, based on the idea of the mood of investors. Trends move in specific directions, gaining momentum as more investors move in the direction of the trend, and changing direction on a large scale as people tend to jump on to trends as they happen. Elliot Waves are a way of analyzing those patterns in any time frame and predicting the way the market will move.

WHO DISCOVERED THEM?

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. It’s especially useful in the Forex market, as there is a very huge amount of data to analyze, and it involves a massive amount of people making trades every second of every day.

HOW DO ELLIOT WAVES WORK?

There are two types of waves in the Elliot Wave principle – impulsive waves and corrective waves. Impulsive waves drive the market. Corrective waves, as you would imagine, offer corrections to those impulses. In order to fall within the Elliot Wave principle, there is a specific pattern to the way these impulsive and corrective waves behave. These patterns can be seen over any time frame, from minutes to centuries.

WHAT ARE THE WAVES?

There are five waves in the dominant trend and three waves in the corrective trend. In the dominant trend the waves are either moving in a general up (bullish) or general down (bearish) direction. 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. The third wave (Wave 3) is again impulsive, as more people jump onto a trend, and is often the largest of the waves. It moves well past where Wave 1 ended. 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. It reaches the highest (or lowest in a bear market) point of the trend, before the corrective phase begins. 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. Within each of these waves you’ll find smaller waves that follow the same principle over a shorter time frame, and the waves are usually part of a bigger trend that also follows the same principle over a longer time frame. This is known as a fractal – where patterns are similar over all degrees.

HOW ARE ELLIOT WAVES USEFUL?

You can use Elliot Waves to help determine when to get into or out of a trend. They’re not magic, and aren’t a way to make ironclad predictions about the Forex market (if that was possible, we’d all be billionaires now, wouldn’t we?). But they’re an extremely useful tool in analyzing the way that the market moves.
If you would like more information on Elliot Waves or general information on Forex trading, visit my web site at http://www.tradingsignalsfx.com

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