Technical Analysis (8) Elliott wave theory

Elliott wave theory

Ralph Nelson Elliott discovered in the 1920s and 1930s that the stock market, in fact, it moves in a circular motion. Although it seems to move randomly

The market moves in repeated cycles, reflecting the moods of investors and traders, which were affected. These effects could be the result of the news, a prevailing psychological state, or a deliberative intensity during externally That time.

Elliott demonstrated that a mood swing up or down always shows the same repetitive cycle, which He described as "waves". Thus, this theory was known as "Elliott Wave Theory".

Although this theory targeted the stock market, it became popular with forex swing traders.

3-5. wave pattern

Elliott's theory explains that a trending market moves in a 3-5 wave pattern. The initial five waves are called the (impulse wave), while the next wave 3 is called the (correction wave).

wave 1

This wave represents the market's first upward movement. This usually results from a small number of people rushing to the market. To buy the asset (because of any of the influences), they are of the opinion that those shares are cheap, and the time is perfect to buy them.

wave 2

At that touch point, the process of making a profit takes place. As a result of what buyers see of those shares, they exaggerated their value. As a result of this behavior, the shares will go down. In any case, the share price will not reach the previous lows, so it is considered Investors have a good buying opportunity again.

wave 3

In normal conditions, that wave is the strongest and the longest. When that asset grabs the public's attention, they want in becoming part of the verb. The above causes the price to rise to the top, to top, and exceed its previous peak. reached in wave 1.

wave 4

At this point, people are making a profit, and this is an expensive asset. However, the strength of this wave will be weakened, because Many people remain optimistic about the asset. They want to buy when the price is low, at the “point of The world.”

wave 5

During this wave, there is the largest number of buyers. What moves the momentum through this fifth wave is a case of Hysteria. Buyers start creating illogical reasons to buy the asset. During that wave, the origin occurs in a state of Overbought, as there are few buyers to maintain the high price.

ABC correction

We know the occurrence of a trend reversal through 3 waves that represent this corrective reversal of the first five waves. and dal From numbers, we express these waves in alphabetical terms.

Elliott waves are not only suitable for rebounding markets, but also for bear markets. The above graph could look like Also like the figure below.

waves within waves

Another important concept of Elliott Wave Theory is “sub-waves”.

Looking at the graph above, we can see that wave 1 consists of 5 impulse waves. And wave 2 on the side The other consists of 3 smaller corrective waves. Each wave, in turn, consists of a group of waves on the pattern of the model. 3-5.

Using the daily chart of the EUR/USD pair from 06/2007 to 07/2008, you can notice a 3-5 waves model. Although this is not clear, as we started with, when you gain greater experience Dealing with them, it is easy for you to identify them.

To be able to identify these patterns you have to find the right point to start with. When could you identify the waves? You will be able to see their practical applications of them in all aspects of forex trading. It could be your right challenge The models are very useful in deciding when to enter the market and when to leave it.

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