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Thread: Elliot Wave Theory - What Happens with Forex Markets

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    Default Elliot Wave Theory - What Happens with Forex Markets

    In the late 1920s, an accountant named Ralph Nelson Elliott theorized that rather than being chaotic, the stock market tends to trade in a certain up and down pattern that is primarily affected by mass psychology. He referred to this pattern as "waves", and published his findings in the book "The Wave Principle" in 1938, and also in a series of articles in the magazine "Financial World".

    The basis for the theory is the idea that group psychology moves back and forth between optimism and pessimism, and prices tend to reflect this by moving according to society's current mood. Elliott proposed that the pattern alternates between five waves and three waves, where in the first five, waves 1, 3, and 5 move in one direction and are called "motive" waves while the second and fourth waves move in the opposite direction, acting to correct each of the previous waves. Hence they are called "corrective" waves. In a bull market, when prices are generally rising, the general direction of the first group of waves is upward, and the trend is downward in a bear market. At the sixth wave, the trend reverses itself, and heads down in a bull market, and up in a bear market. There are only three waves in this grouping, however, with the first and third traveling in one direction and the second wave correcting the first by traveling in the opposite direction. Each wave is driven by certain predictable actions in the marketplace such as short covering from the previous leg down, profit taking from the preceding rally, and traders "piling on" when a major rally is occurring. Traders who can develop a good understanding of these events will hold the key to the theory.

    One interesting aspect of Elliott's Wave Theory is that each wave is made up of another 5-3 pattern, and then each of these smaller waves is also made up of a 5-3 pattern. When patterns repeat themselves inside each other, this is known as a "fractal" effect. By recognizing this price action, traders can narrow the picture down and be able to visualize a more accurate picture of what is going on with the currency.

    Although it was developed based on the stock market, the Elliott Wave Theory is also applied to forex trading quite regularly, as the foreign exchange market has many similarities to the market for equities. Some investors choose to base their analysis on a candlestick chart of daily forex prices, which is a type of bar chart that plots the high and low prices of the day along with the opening and closing prices. The body of each bar is denoted by the gap between the opening and closing price and is white if the currency rose that day and black if it declined. In addition, each bar is augmented by a "wick", which is a line representing the high and low prices for the day. This chart is popular because it is very visual and extremely easy to understand. By plotting the waves according to Elliott's theory, one can extrapolate the trend and try to tell the general direction and length of the current and next waves. By doing this, traders are able to make an educated guess as to where the currency price is headed.

    Although this information is valuable, the Elliott Wave Theory is just one piece of the technical analysis puzzle, and the smart trader will use this tool along with several others to get a better picture of the forex market. No one method should be relied upon by itself, but when combined with other indicators such as the five-point pivot line system, the Elliott Wave Theory can help the forex trader greatly.
    by.forexaxis.com

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    While building a career in trading one will cross the paths of many different faces with an astoundingly high rate. This facet of the learning experience offers the astute observer an opportunity to study the attributes of the countless faces that come and go, allowing one to determine just what makes a losing trader a loser.

    The common thread I have found is that many losers fail to take the time to objectively examine the origin of trading related ideas, and more specifically, the rational that they are based and constructed upon. They fail to do so because a certain level of discomfort, that we all feel mind you, associated with just taking a look in the mirror.

    Take more time out of your trading day to examine your thought process, you very well may be rewarded for your suffering

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    Elliot Wave Theory is very popular i tried it a few times but not enough to getting it celeverly it's kind of complicated to me how about you guys
    baby Ahmed Mahmoud

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    i have tried this theory but it didn't work well for me maybe i don't understand it have any of you guys tried it?

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    the key to successful trading is to think one up than the rest of others, i just try to learn the properties of various pairs by constent observation and place my trades accordingly

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