Get to know Elliot Wave in Forex Trading
Elliott Wave Theory was first created by Ralph Nelson Elliott to characterize the stock market movement as a series of recurring waves that have special characteristics that are also useful for predicting future market movements. This theory was later elaborated by his followers in an effort to make it more in line with current trade. If you can recognize parts of Elliot Wave at the initial stage, you can predict the market.
Ralph Nelson Elliott
Elliott Wave’s theory was discovered by Ralph Nelson Elliott, an American investor. Elliott in his career as a professional accountant is familiar with numbers, data and statistics. This is what then makes Elliott find a system of analysis of price movements in stocks, forex and similar investments which are now often referred to as technical analysis .
Elliot started his career by being a train accountant in Mexico and Central America that lasted up to 25 years. He served as an executive in several railroad companies as well as managing the company’s finances using newly developed accounting principles such as new records, anticipating future costs and allocating revenues to be more effective. Most American-owned companies will put Elliot in charge because he has fluency in Spanish and understands the culture that runs in Latin America as a whole.
Elliot Waves is one of several studies that are used for technical analysis that can describe where the current market position is and where the next market is going.So by using this theory it can provide opportunities for online forex traders to make decisions in trading.
This theory was not found by Elliott within 1 day. Elliott finds out if the upward and downward price waves are caused by collective psychological collections of traders. Elliott then referred to this as Wave. The interesting thing is that this wave will occur in repetitive patterns. From here comes the claim that the Elliott wave helps traders predict the direction of price movements.
Elliot Wave theory is simply as follows:
- Wave 1 – usually the weakest movement of the impulse wave. It is based on short- covering of the previous bearish movement.
- Wave 2 – created at the end of the first wave and after the currency pair enters the selling phase it will end when the market fails to make a new lowest price.
- Wave 3 – is the longest and most powerful wave of the impulse wave. Usually in this condition the market is in a position to buy or sell. Currency movement in the direction of the trend that moves slowly but tends to be fast when it stops at the highest price which is above the peak of wave 1.
- Wave 4 – the correction phase will occur especially after the trend has strengthened. This is also used by traders to profit by opening the way for prices to enter wave 4.
- Wave 5 – will occur when the currency pair moves to the rally to enter the rally movement on wave 5. This wave is much in wait by a small trader because for the size of large traders are perceived less give the momentum as felt on the 3rd wave.
How to use Elliott Wave theory for forex trading
Examples of the practice of using Elliott Wave theory in determining entry points, stop loss and take profit can be explained from the following forex trading scenario.
One time you find an uptrend followed by a downtrend so it needs correction. To determine an appropriate entry point, we must use the three rules of Elliot Waves theory, that is, wave 2 never falls under wave 1 in Impulse Wave. Then waves 2 and 4 will more often bounce back on fibonacci retracement levels .
After you draw the Fibonacci retracement line and it turns out that the price has been at the 50% level which at the same time becomes a prediction that wave 3 will appear with a strong upward trend. A time like this is a strong signal to buy (strong signal buy).
Next, since we have to limit losses we can set stop loss as part of risk management at the lowest point of trade which refers to the second Elliot Wave theory where wave 2 will never fall below the first wave in the Wave Impulse. This is what you will get after taking great care of the fibonacco retracement of Elliott Wave.
In short, the Elliott Wave analysis can be used to evaluate as well as a tool used by forex traders in increasing trading opportunities.