ELLIOT WAVES - WHAT ARE ELLIOT WAVES?

The Forex market on first glance looks extremely chaotic. The term volatility doesn't do it justice. 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. But you don't necessarily have to, since people have found patterns in it. One such method for this is known as the Elliot Wave principle
ELLIOT WAVES

Elliot Waves are a pattern of price fluctuations on a financial market. Elliot Wave theory says that the moods of people change in predictable ways. 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 is the way those patterns look.

WHO DISCOVERED THEM?

Look no further than Ralph Elliot, an accountant in the 1930s who wrote a book called The Wave Principle. Not only did his theory predict stock prices, but all kinds of group behaviours. Elliot Waves can be used to predict everything from fashion trends to election results. And because the Forex market has such a massive amount of data to analyze, they're perfectly suited to it.

HOW DO ELLIOT WAVES WORK?

The two forms of waves in the Elliot Wave principle - impulsive waves and corrective waves. Impulsive waves impel the forex market. Corrective waves, as you would imagine, deliver corrections to those impulses. They have to work a specific way to be Elliot Waves. They're in every single time frame you can look at.

THESE ARE THE WAVES

There are five waves in the dominant trend and three waves in the corrective trend. In a bullish market they trend up then down, in a bearish market down then up. 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 impulsive again, and usually the biggest wave. 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. This is the end of the dominant trend and beginning of the corrective trend. 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.

HOW ARE ELLIOT WAVES USEFUL?

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.

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