FOREX Trading Strategies


Trading with Elliott Waves



The Elliott Wave is a technical analysis technique named after Ralph Nelson Elliott who studied the stock market movement of the 1930s. He observed and identified repetitive patterns in the stock market and in nature.  He believed all human activities were influenced by these identifiable wave series.   He published several articles in 1939 in the 'Financial World' magazine. After his death, others such as Hamilton Bolton (1960) and Robert Prechter (1978) advanced Elliott's work through books and newsletters.


Underlying forces in the market are constantly contending in a kind of tug-of-war.  Every move or thrust is followed by a corrective response.  This creates the basic concepts of the Elliott Wave Theory:

  1. Action is followed by reaction.   I.e.. a trend is followed by a retracement.

  2. The main trend will contain 5 waves, followed by three corrective waves.

  3. This 5-wave and 3-wave cycles are two legs of the next higher order wave.

For the sake of illustration, a trend or thrust will be indicated by the letter 'T', and a corrective reaction or retracement by the letter 'R'.   The 5 waves in the main trend wave would be the represented by  T-R-T-R-T.  Thus the main trend is made up of 3 T-waves and 2 R-waves.   The convention is to label these 5 waves with the numbers 1, 2, 3, 4, and 5.


The 3 waves in a correction or retracement would be the pattern  T-R-T and labeled on the chart with the lower case letters a, b, and c.  The correction is always a move in a direction opposite the 1-5 move's direction.


Elliott Wave Theory says that each wave within a wave contains a 5-3 wave count of a smaller cycle.  Thus, in a big T wave will be found 5 smaller waves in the T-R-T-R-T pattern.   And in the big R wave which is the reaction to the big T wave will be found the 3 smaller waves in the T-R-T pattern.



Elliott Wave practitioners seek to predict the future by determining where the market is in the unfolding wave pattern.   They often use Fibonacci price and time relationships found in the wave formations to predict both the time and price of future wave completions.  The primary weakness of Elliott Wave Theory is the determination of the wave count.  When the market creates a wave pattern that is at odds with the current wave count, practitioners reevaluate their wave counts and relabel the waves.



Do you want to know more?


Elliott Wave International's tutorial is the most comprehensive introduction to the Elliott Wave Principle available in cyberspace. All ten lessons have been adapted from Prechter and Frostís Wall Street bestseller, Elliott Wave Principle - Key to Market Behavior.


How Analyzing Forex with Elliott Wave Can Help You Catch Both Rallies and Declines
FreeWeek of Elliott Wave International's Currency Specialty Service is here thru Nov. 18
November 12, 2010

By Elliott Wave International

On November 1, the EUR/USD -- the euro-dollar exchange rate and the most actively-traded forex pair -- was trading the $1.38 range, near the level it is today.

But if you look at what the EUR/USD did between November 1 and 9, you'll see a huge 400-point (or pip, in forex lingo) rally into the November 4 top -- and an equally huge decline back to the levels we see today.

That's an 800-pip "round trip" in just six trading days -- a huge move which obviously caught a lot of the U.S. dollar bears and bulls by surprise. Could you have seen it coming?

If you know how to analyze currencies with Elliott wave, the answer is probably "yes." Wave analysis helps you identify patterns in market charts and tells you how those patterns -- ideally -- should develop. In other words, Elliott allows you to narrow down multiple possibilities to a handful of probabilities.

A probability is never a certainty. But it's better than a shot in the dark, as this example demonstrates.

On November 1, Elliott Wave International's Currency Specialty Service posted the following end-of-day forecast. (Some Elliott wave labels removed for this article): 

Currency Specialty Service

[Higher, into a top] The euro is poised to thrust above 1.4160. The question is if the thrust takes place before the FOMC announcement and ends afterward, or starts in response to the announcement. Before or after, the euro should hit new highs.

What gave Currency Specialty Service the confidence to make that forecast? It was the "contracting triangle" pattern you see in the chart above. They often appear in 4th waves, right before the market's final push in wave 5. The EUR fulfilled the forecast with a 400-pip rally into the November 4 top. The following day, our Currency Specialty Service wrote:

The euro is reversing course after a thrust from a triangle. The decline from 1.4283 might not be in five waves, but it has the characteristics of an impulsive wave. A correction of the rally from August should reach the 1.3636-1.3700 area, the 38.2% retracement of the advance... 

...which brings us to the price levels where we find the EUR/USD today. And if you're curious to know what Currency Specialty Service has to say now, you have a great opportunity: 

This article was syndicated by Elliott Wave International and was originally published under the headline How Analyzing Forex with Elliott Wave Can Help You Catch Both Rallies and Declines. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.



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