Learn “Wave” as a Forex Trading Strategy
When you look at price movements, you may (surely?) Realize that the price chart never moves in a perfect straight line. There are always “zigzag” which are shaped like waves. Did you know that it turns out that in the late 1920s there was also a trader looking at this? The results of the “reflection” were later known as “Elliott Wave Theory” , named after the creator, Ralph Nelson Elliott. Well, this time we will learn to recognize the basic concept of the theory, which is now quite popular as well as one of the strategies in forex trading .
Elliott realized that the “wave cycle” that occurred was the result of market reaction, or was a reflection of market psychology at the time. He found that “swing” which is an up and down movement always appears in repetitive patterns.
Elliott’s theory is actually rooted in Dow theory ( discount everything , price moves in trend , and history repeats itself ). Likewise, Elliot managed to detail the matter and analyze it in more detail.
Market estimates based on “wave”
Elliott made a more detailed price analysis based on the unique characteristics he found in the “wave” pattern itself. There is a wave called impulsive wave , which is a wave that moves in the direction of market movements. This wave always shows five waves .
Uniquely, if zoomed again, in each impulsive wave there are also five more waves ! In the Elliott Wave principle, this smaller wave is marked by a different “degree”.
Until here first , so as not to confuse, huh? Later there will be an image that can explain it. Patience, OK? 🙂
We have learned that in the world of forex trading we know that prices always move in certain trends. It has been mentioned at the beginning of the article that the movement never happened in a perfect straight line. Elliot understood this as “action and reaction”. Each movement (action) is always followed by another movement that is opposite in direction (reaction). The usual “reaction” is reflected by what we have known as “correction” or “pull-back”.
By Elliott, this “action” and “reaction” is labeled as ” impulsive” and “corrective” wave.
What is the shape?
Eliott Wave Theory has the following basic concepts:
- Every “action” is always followed by a “reaction”
- The FIVE impulsive wave moves in the direction of the trend, followed by the THREE corrective wave . To be easier, we can use the term “5-3 Move”
- 5-3 Move is a cycle
- 5-3 This move then becomes a bigger part of 5-3 Move
- This pattern will be constant, but the duration can change
How? Confused? Hopefully not. To help understand the concept above, consider the following picture.
The picture above is a movement consisting of EIGHT waves , namely FIVE WAVE UP and THREE WAVE DOWN. The formed wave is labeled 1, 2, 3, 4, 5, A, B and C.
Well, now you can see, right ? The long concepts above can be explained easily through images.
It became popular in the 1970s
In the 1970s, the popularity of the wave concept began to climb thanks to Frost and Prechter. They published books that are still considered legendary, titled “The Elliott Wave Principle – The Key to Stock Market Profits” . In this book, the authors estimate that in the 1970s the stock market would, and Robert Precther predicted a market collapse in 1987.
Formation of the corrective wave usually has three different movements, namely two waves in the direction of correction (A and C) and one wave against the direction of correction (B). Wave 2 and 4 in the picture above are corrections. If zoomed again, the wave will look like this:
Note that waves A and C move in the direction of the short-term trend, and therefore are impulsive waves and consist of five more waves, as seen in the picture above.
The impulsive wave formation, followed by the corrective wave, forms the Elliott wave which consists of trends and corrections. Although the patterns described in this article are bullish patterns, the same applies to bearish conditions.
Although at first this theory was practiced on the stock exchange, but in its development people began to learn to apply this theory in forex trading too.
Elliott Wave levels
Elliott wave has levels from the largest to the smallest. The following are the levels:
- Grand Supercycle
Of course, to be able to apply this theory in forex trading, you must learn to recognize in advance where the main wave is, or the supercycle. Then you can determine which position you will take to buy or sell.
This is certainly not an easy thing. On another occasion, hopefully we will be able to discuss Ralph Nelson Elliott’s creation theory in more detail.