Elliot Wave theory

The Elliott Wave Theory is named after Ralph Nelson Elliot, who discovered that the stock markets behaved in a "wave" pattern that helped determine future direction of the market.

Fortunately for us principles of Elliot Wave are applicable across all financial markets. And what better place to use it than the largest financial market of all – the foreign exchange markets.

So what does the "Elliot Wave Principle" say?

Its simply says that price movements in a financial (in this case "forex") is in essence the psychological measure of people in that market. Hence mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns.

If you can identify repeating patterns in prices, and figure out where we are in those repeating patterns today, you can predict where we are going.

Applying the principles of Elliot's Theory, you can see that currency prices in the forex markets oscillate between the corrective phase (the lower graph) and the impulsive phase (the upper graph) – as shown in the image to your right. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3.

Elliott's theory states that in "trending markets" there are 2 patterns that form. The waves look similar to as shown in the image. We have added some color to simplify which part of the wave is associated to a number.
1. "Impulsive waves" - consists of 5 waves which moves in the same direction as the trend
2. "Corrective waves" – consists of 3 (or) ABC waves which moves in the direction opposite the trend.
You will learn more about these patterns in the next lessons.

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