What is the Elliott Wave Theory in forex?
Direct from the desk of Dane Williams.
The Elliott Wave Theory in forex helps you identify market trend direction and provides ideal entry and exit points to trade.
By depicting strong market trend sentiments, the Elliott Wave Theory helps you predict future market movements and serves as a fundamental framework for interpreting market dynamics.
Through this improved understanding, you can and will make much more accurate trade decisions.
Overview of the Elliott Wave Theory in forex
The Elliott Wave Theory is a comprehensive analysis of a currency pair's prolonged price trajectory within the forex market.
It revolves around identifiable wave patterns that facilitate the identification of significant price extremes.
Fundamentally, the 'waves' depicted in the Elliott Wave Theory denote the price levels of a currency pair.
These waves crystallise into a distinctive pattern comprising five waves aligned with the prevailing market trend and three counteractive waves, offering you strategic entry and exit signals:
- Level 5 signifies the peak of the market, signalling your exit point.
- Level 2 denotes the market's bottom, presenting you an opportune entry point.
Types of Elliott Waves in forex
1. Impulse waves
Impulse waves, also referred to as motive waves, constitute the initial five waves of the pattern that move in tandem with the prevailing market trend.
Comprising three upward sub-waves and two downward sub-waves, they highlight robust market movements and the lowest price threshold, enabling you to adopt long or buying positions.
The formation adheres to three cardinal rules:
- The second wave must not retract beyond 100% of the first wave.
- The third wave is never the shortest among all waves.
- The fourth wave should not exceed the third wave's extent throughout the formation.
2. Corrective waves
Corrective waves encompass three waves that counteract the prevailing market trend.
Comprising one upward sub-wave and two downward sub-waves, they signify market correction from the preceding trend and pinpoint the highest price level conducive for short or selling positions.
Key characteristics include:
- The first wave in this phase constitutes less than 50% of the last wave.
- The second wave (from A to B) denotes the least price increment in the entire formation.
- The final wave (C) invariably emerges as the lengthiest, delineating a decline in price movement.
How to identify the key Elliott Wave Patterns in forex
Flat pattern
The flat pattern embodies three corrective waves, featuring two downward sub-waves and one upward sub-wave.
Waves A and B denote corrective movements counter to the market, while wave C represents an impulse movement in alignment with the market.
It aids you in discerning corrective market shifts and making informed entry and exit decisions.
Zig-zag pattern
The zig-zag pattern constitutes a corrective wave comprised of three distinct waves that denote pronounced upward or downward market directions.
Waves A and C represent impulse movements in line with the market, while wave B embodies a corrective movement against the market.
These waves indicate sharp market fluctuations, facilitating strategic trading decisions.
Triangle pattern
The triangle pattern comprises five waves (A, B, C, D, and E), constituting a corrective market pattern that balances prevailing market directions.
Comprising three downward waves and two upward waves, it can either contract or expand, signifying fluctuations in price before market correction ensues.
You can interpret these triangles to discern market corrections and adjust your positions accordingly.
Diagonal pattern
The diagonal pattern resembles a contracting or expanding wedge, characterised by multiple waves forming within the pattern.
This impulse wave, encompassing five or more waves, provides you with insights into existing market momentum and offers strategic entry or exit points based on market trends.
Final thoughts on trading the Elliott Wave Theory in forex
Based on impulse and corrective waves, the Elliott Wave Theory makes it easier for you to trade with the market direction or against it.
Best of probabilities to you.
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