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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:
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Action is followed by reaction. I.e.. a trend is followed by a retracement.
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The main trend will contain 5 waves, followed by three corrective waves.
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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.
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