ELLIOT WAVE PRINCIPLE - WHAT'S AN ELLIOT WAVE?

The Forex market looks like total chaos. It's extremely volatile, with many price fluctuations in either direction, over and over again. Just looking at it and trying to make sense of it can be very scary. Smarter people than me though have discovered ways to see patterns in the market. One such method for this is known as the Elliot Wave principle
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 theory says that the mood of investors (or large groups of people in general) change in predictable patters. 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 representations of these patterns over any time interval, allowing the market to be somewhat predictable.

WHERE DID ELLIOT WAVE THEORY COME FROM?

The Wave Principle was a 1938 book by an accountant named Ralph Nelson Elliot, first espousing Elliot Wave theory. 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. Elliot Waves apply to pop culture trends as much as they do to market trends. 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?

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

WHAT ARE THE WAVES?

There are five dominant trend waves and three corrective trend waves. They look like a mountain in a bullish market, a valley 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. The third wave (Wave 3) is again impulsive, as more people jump onto a trend, and is often the largest of the waves. It well surpasses 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 dominant trend stops and the corrective trend starts. 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.

WHAT CAN YOU DO WITH ELLIOT WAVES?

You can use Elliot Waves to help determine when to get into or out of a trend. This isn't ESP - they don't predict the future 100 per cent of the time. But they're an extremely useful tool in analyzing the way that the market moves.

If you'd like more information on Elliot Waves or general facts about Forex trading, visit my web site at http://elliottindicator.com