What is Elliot Wave Theory?
Elliot Wave Theory is a popular form of technical analysis used to identify market cycles and forecast potential price moves in the currency markets. The theory is based on the idea that markets move in repeated cycles, which can be identified and analyzed to make accurate predictions about future price movements.
This theory was developed by Ralph Nelson Elliot in the 1930s, who observed certain patterns in the stock markets. He discovered that market trends were not random, but instead followed a repeating pattern of five waves in the direction of the trend, followed by three corrective waves against the trend.
The Five Elliot Wave Analysis
The first wave is the result of an influx of demand from traders in the market that has been investigating the asset. This wave results in market growth, which lasts until a peak price is reduced by sellers in the market coming in and taking their profits.
The second wave is a temporary reversal caused by profit taking from those traders that had initially invested in the asset in wave one. The decrease in price to create the second wave is a correction in the market.
The third wave is the biggest and strongest wave of the five, and comes as a result of a renewed interest in the asset or currency. This strong surge in demand creates new highs or lows, which are well outside of the range created in Wave 1. In Forex trading specifically, wave 3 is found to be the most popular to trade on.
The fourth wave, again, is a temporary correction in the market caused by some profit-taking from traders who participated in the third wave. This wave does not usually go lower that the low of Wave 2, which makes it an excellent opportunity to buy into the trend at a lower price. The fourth wave provides an ideal opportunity for traders to open new positions and join the trend.
The fifth wave is the last portion of the larger market trend. It is generally caused by an increased demand for the asset, and lack of sellers willing to sell at this higher price. This stage is problematic, as it is an indicator that the trend is ending soon, and the fifth wave is often followed by a correction.
How to Use Elliot Wave Analysis in Forex Trading
The Forex market is exceptionally open and liquid, which makes it an ideal place to apply Elliot wave analysis. The concept of cycles within the Forex market means that markets are not random, and that each market always exhibit certain patterns.
Below are a few tips on how to apply Elliot wave analysis in Forex trading: Gain further insights about Delve into this useful material with this external source.
Conclusion
Elliot Wave analysis is a fantastic tool for Forex Trading. However, traders should first understand the efficient operation of the Forex market and recognize that knowledge of basic technical analysis tools is necessary to put wave analysis ideas into practice. After obtaining knowledge of technical analysis tools such as trend identification, Fibonacci retracements, and many others, a trader can start learning and practicing Elliot Wave Analysis to make accurate predictions in the Forex market.
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