Elliot’s Waves: The most important thing
Elliot Waves is one of the most frequently mentioned indicators of Forex. Wave theory of market analysis causes disputes throughout its existence. In fact, the wave models in the charts are a reflection of the moods of market participants – a concept that is very subjective, but quite obvious.
Ralph Elliott first discovered the theory of wave oscillations in financial markets back in 1938. It was he who drew attention to the fact that some algorithms tend to repeat themselves, forming a cyclic motion. There are five active waves in the trend direction and three anti-trend waves, the so-called correction waves
Elliott’s Wave Theory is based on a bond in which both action and opposition are observed. At the same time, the market trend determines the dominance of the five-wave, active force. And the absence of a trend is three waves of correction. That is, the directed market is determined by pattern 5-3, while the market in the flute is determined by pattern 3 – 3 (equilibrium).
When applying the Elliott waves, it is worth remembering that they are not static and reflect the market dynamics. The theory of waves is based on the fact that the market sentiment can be quite obvious, if you know exactly what to look for on the charts. Moreover, it is somewhat similar to the theories once advanced by Dow in forming his trading forecasting ideas.
What do Elliott’s waves look like on the charts? As connected as a broken line, multidirectional segments, five of which will show the trend direction, and three – to correct the price movement (Fig. 1). When trading on the flute of the waves there will be three waves each – an equal number that creates the prerequisites for the formation of a calm market.
Elliott’s rising waves are called impulse waves. Downwards – corrective. In this case, depending on the direction of the waves on the chart, you can get an uptrend or a downtrend.
It should be taken into account that on the Elliott’s chart the correction waves will always be located in the opposite direction to the location of the impulse waves.
It should be taken into account that, of course, the lines on the charts do not look like straight lines – each of the individual waves (cycles) is formed of smaller wave cycles, because the price movement is cyclical (Fig. 2). That is, it is not easy to recognize the Elliott waves on the charts even for an experienced player, not to mention the beginner traders, for whom the methods of mathematical analysis are often too difficult. Meanwhile, the theory of waves is based on the principles of Fibonacci numbers – that is, each row begins with one, and the next value can be obtained by simply summing up the two adjacent numbers
The Fibonacci sequence determines the limb of a wave going in one direction. For example, the three-day trend shows that at least two more days the direction of price movement will remain unchanged. And the five-day trend will last up to 8 days. The nine-day trend cannot end earlier than on the thirteenth day. In fact, this makes it possible to apply Elliott Wave Theory to any length of time – from hours to days and weeks or months.
Elliott’s waves have a certain relationship with each other.
For impulse waves
Wavelength 2 is 0.618 or 0.382 of wavelength 1
Wavelength 3 – 0,618, 1, 618 or 2,618 of wavelength 1
Wavelength 4 – 0.5 or 0.382 wavelength 1
Wavelength 5 – 0.618, 0.5 or 0.382 of wavelength 1.
For correction waves
Wave A is 0.5 or 0.618 of wavelength 5
Wave B is 0.5 or 0.382 of wavelength A
Wave C is 0.5, 0.618 or 1.618 of wavelength A
In this case, the permissible error in the ratio of wavelengths, depending on the trading situation, can reach 10%. And the waves are arranged according to certain rules: wave 2 never reaches the lower point of wave 1, wave 3 can not be shorter than all other waves, wave 4 is never located in the price range of the first wave.