Stock market is usually associated with mess or unpredictability. Actually, some patterns are always created inside, and they are repetitive. Therefore, an American forex trading analyst, Ralph Nelson Elliott, invented a theory called Elliott Wave to help traders identify the patterns. Forex Elliott wave is used to analyze the price patterns for stocks, forex, and other securities.
Fundamentals of Forex Elliott Wave Theory
According to Elliott, the market fluctuates in a wave pattern called 5-3 waves. They are classified into two phases:
Phase I (5 waves) is called impulsive wave. The waves forms the main trends. When prices move to one direction during a certain period is an simple example of impulsive waves. The imbalanced market sentiments force the prices to move into a certain direction. In euphoric condition, the prices increase continuously. Meanwhile, in panic condition, the prices will decrease continuously.
Phase II (3 waves) is called corrective wave. Imbalances during the impulsive phase will be followed by corrective wave, which leads to equilibrium. Elliott notes that the corrective waves usually consist of three phases.
The principle of Forex Elliott Wave theory is any impulsive waves will reach an equilibrium spot. The faster the prices increase, the faster it will decrease. Likewise, the faster the prices decrease, the faster they will increase. The cycle repeats all the time even under very fluctuating conditions.
Forex Elliott Wave Theory: Things to Note
The Elliott Wave is helpful in predicting price movements. However, beginners often find it difficult to apply the Forex Elliott Wave. A number of reasons are behind it, including:
Formulating the trading system can be challenging for newbie, particularly in determining the entry and exit rules for every phase in the Elliott waves.
The trading signals can be subjective in terms of interpretation. Beginners mostly lack this ability;
Elliott wave is not a stand-alone oscillator. It is best combined with additional oscillators, particularly to find out the entry and exit points.
However, when the traders can determine the wave positions correctly, they can earn huge profits. Of course, it may take times and determination on the part of traders.