The Elliott Wave – The Ultimate Guide for a Forex Trader!
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Technical analysis changed in time together with trading. Even though traders mostly follow robots today, some things remained the same. The Elliott Wave Principle key to market behavior is one of them. Elliott waves look at markets from a human nature point of view. As such, the Elliott Wave Elliott wave analysis forex trading allows traders to catch perfect trades. They use the same rules for various markets.
But Elliott developed the trading theory on the stock market. For, human nature is the same. As such, the Elliott Wave Principle works on all financial markets. Yet, Elliott Waves works under these conditions too. What Elliott did was to lay the rules of a logical process to understand market behavior. He strongly believed that market and human behavior are the same.
One is the result of the other. Therefore, the Elliott wave elliott wave analysis forex trading and the overall theory represent a road map to human behavior. To this day, the Elliott Waves Principle is one of the most complex trading theory that exists.
If not, the most complex one. To put order financial markets movements under a set of rules is no easy task. Yet, Elliott did it. The rules that make the Elliott Waves are both logical and precise. As a result, Elliott Wave predictions have a great degree of accuracy.
In his efforts to understand the market, Elliott started from a basic concept. The market moves in waves. He divided the waves into two main categories: But there was still something missing. How to connect them? As such, Elliot Waves consider different cycles of different degrees.
And a cycle has both an impulsive and a corrective wave. Any Elliott Wave trader knows that an impulsive wave has five waves of a lower degree. A so-called five-wave structure. However, a corrective wave has only elliott wave analysis forex trading. Because of that, an Elliott Wave cycle shows a five waves market decline or elliott wave analysis forex trading, corrected by other three waves. As such, a bullish or bearish cycle has a a-b-c count. These eight waves form the Elliott wave principle key to market behavior.
Elliott stressed the importance of understanding the market elliott wave analysis forex trading. They make the Elliott Wave Principle look like a complex theory.
The idea is to integrate the impulsive and corrective waves into the right cycle. But this is the most difficult thing to do. Because of that, many traders fail at correctly counting the waves. Where does a move start from?
Where does the correct count start from? An impulsive wave is a five-wave structure. We mentioned earlier Elliott used numbers to count the waves: These five waves can be the 1 st wave of an impulsive wave of a bigger degree. Or, the third wave. Or the fifth one. It may be even the first part of a corrective wave. To complicate things even further, not ALL five waves show impulsive activity.
Only the first, the third and the fifth one. Also, depending on the nature of the a-b-c correction, both waves a and b might be impulsive.
Here are the rules of an impulsive move according to Elliott Waves:. On top of the above rules, the Elliott Waves Principle states that:. While it represents a great starting point, it is just that. Only a starting point. Elliott found that in an impulsive activity at least one wave must extend. But what is an extension? As a rule of elliott wave analysis forex trading, an extended wave is bigger than The extended wave is always the one that stands out of the crowd.
Simply look for the longest one. An Elliott wave indicator mt4 platform offers will automatically plot the extension. However, even without it, any trading platform makes it easier to find it thanks to the Fibonacci Expansion tool. The most common wave to extend is the 3 rd wave. In fact, out of all impulsive waves the market forms, 3 rd wave extensions form most of the times. Naturally, the 3 rd wave is the longest in the five-wave structure.
And, it is an elliott wave analysis forex trading wave on its own. Just of a lower degree. Elliott wave predictions in such an impulsive wave consider opening a trade when the 2 nd wave retraces. That is if the impulsive wave is bullish. Obviously, they short in a bearish trend. Finding the entry is an easy task. This elliott wave analysis forex trading, traders use the Fibonacci Retracement tool. Hence, in a bullish move, they buy the For such a trade, they target But, projected from the end of the 2 nd wave.
The extended level represents the minimum distance the price must travel. This is one of the reasons that make the Elliott wave principle key to market behavior. However, in strong impulsive wavesthe price travel much more than that. Second, the stop loss is at the start of the 1 st wave. Finally, the extended level gives the take profit. Perfect setup, great trade. After the elliott wave analysis forex trading rd wave extensions, the 1 st wave ones come next. Logically, the 1 st wave is the longest one.
Not only that is the longest, but Elliott rules give the limits for the other ones. Again, such limitations give the stop loss to any trade that might result.
It barely reaches As such, traders that want to open a trade must find other condition to set the stop loss. This type of impulsive waves are the rarest ones. When they form, the 5 th wave is the longest one. The one that stands out of the crowd. Elliott found only a couple of instances when this impulsive wave appears. Because of that, whenever such an impulsive wave elliott wave analysis forex trading, the market retraces the 5 th wave almost completely.
A double extended impulsive move. When this one forms, both the 3 rd and the 5 th wave extend. And the 5 th wave extends when compared with the 3 rd one. But, this seldom happens.
The 3 rd wave extension makes the Elliott Wave principle key to market behavior. In fact, it spends most of the time in consolidation. Therefore, corrective waves form most. It is no wonder Elliott found multiple types of corrective waves. In his pattern recognition approach to corrective waves, Elliott used the same principle.