What is Elliott wave? Guide to identify trading patterns and strategies

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What is elliott wave

What is Elliott wave?

Elliott waves are the methods traders use to form market predictions and price patterns by looking at cycles.

Based on the idea that the market formed similar patterns on the time frame. These models provide data on what may happen next in the market. In theory, it does not depend on the time frame you are analyzing or market movements in the same pattern.

History of Elliott wave theory

The theory was developed by Ralph Nelson Elliott in the 1930s. But was popularized by Robert Prechter in the 1970s. It claims that crowd psychology creates the models and trends we see on the market. school.

Elliott concludes that stock market movements can be predicted by observing and identifying repetitive wave patterns. Elliott waves were able to analyze the market in more depth. Identify specific characteristics of wave patterns and make detailed market predictions based on them.

Watch now: What is the forex market? Is Forex a multi-level scam?

Complete Elliott wave cycle

The combination of dynamic and corrective waves is the structure of the complete Elliott wave cycle. Is illustrated as a structure of 8 waves.

Understand a simple Elliott cycle: At a trending market. Trend following market movements are happening in 5 waves (called momentum wave). Any correction to the trend is taking place in 3 waves (called corrective waves).

8-wave cycle in the elliott bullish pattern

So based on the above concept, it is easy to identify the names of the waves through the illustration:

  1. There are 5 dynamic waves:
    • 3 rising waves are: 1, 3, 5.
    • 2 downward moving waves: A, C.
  2. There are 3 corrective waves: 2, 4, B.

Can see the end of the price movement, the price ends higher than the start. That is the price increase.

Elliott does not necessarily have 5 up and 3 down waves. As opposed to the above trend, the market is in a bearish pattern. The wave pattern will go down and adjust higher. And the closing price will be lower than the starting price.

8-wave cycle in elliott discount model

The fractal properties of the Elliot wave

This concept of fractal properties is explained as follows:

A classification is a geometric object with a crease shape, which can be split apart and each part looks like a whole, but at a lower magnification rate. Wikipedia

Applied to Elliott waves, when combining dynamic and corrective waves. Elliot waves can be described on larger time frames in an easy way.

Specifically, if connecting the points (dashed lines) as shown in the figure below, it will create two unique waves: Dynamic waves (I), corrective wave (II). If you look like this, you will easily imagine the concept mentioned above.

zoom out on a larger time frame

And now let's go analyze each wave type offline.

Dynamic wave

As explained, Dynamic wave is the moving wave following the major trend in the market. Applying the properties of distortion when using a large time frame to describe a dynamic wave (such as a wave (I) some minutes ago):

  • Enlarge dynamic wave (I) will have 5 smaller waves, respectively: 1,2, 3, 4, 5.
  • If the wave 1 is enlarged, there will be 5 waves with a smaller level. The same goes for waves 3 and 5.

This is a 5-wave model. As such, when it is smaller, the waves alternately again have dynamic and corrective properties.

song motivation in elliott

To form Dynamic Waves, the following rules must be met:

  • Wave 2 retrieves 100% less than wave 1.
  • Wave 4 retrieves less than 100% of wave 3 and does not coincide with the price range of wave 1.
  • Wave 3 is always longer than wave 1 and is never the shortest wave.
  • Wave 3 is usually the longest song. That is, in the 3 dynamic waves 1, 3, 5, wave 3 cannot be the shortest wave.

Correction wave

The corrective wave in the elliott wave model is described under the structure of 3 waves A, B, and C. But there are many people mistakenly believe that all corrective waves have the correct 3 wave structure. It has more types and is harder to identify than the tuning wave. It can sometimes be difficult to identify corrective wave patterns until they are completed.

Both the main trend and the reverse trend can open up to the correction pattern in today's market, especially in the foreign exchange market.

Correction waves are probably better defined as models that move in 3 waves. But it should be noted that the corrective wave never contains more than 5 waves. Only the dynamic wave is 5.

corrective wave

Elliott waves used for best deals

Looking at a period of the wave, it can be seen that wave 3 is the longest wave, so it is considered a wave that creates opportunities for trading. Wave 5 too, these are the two Elliott waves forming a trend line.

But do not forget that a move that creates a trend may cause corrections. However, it is also possible to trade while in the corrective pattern, but more difficult and profit generation is also considered smaller.

The Elliott wave trading strategy is highly effective

Consider tracking each wave in the overall price structure. Taking the elliott wave theory, after a 5-wave pattern moves up, a larger three-wave correction usually follows.

Tracking the direction of the corrective wave will signal a potential trend change and that signal is stronger if combined by a 5-wave pattern or the end of a 3-wave correction.

Elliott wave is not a trading technique. There are no specific rules about entry and exit. There is also no correct way to use it in transactions. Therefore, the use of Elliott wave has been avoided by many traders and technical analysts.

If you are going to perform an Elliott wave analysis, you will do a wave count. This simply means that they will sign the waves to see which pattern they correspond to. Thereby allowing you to predict the movement of the market.

However to be successful not only use elliott wave theory. A combination of other methods will help a lot.

Fibonacci As an example, this is a perfect combination and scientific nature. Side wave Elliott helps form the frame. Fibonacci side will bring its tools to measure price movements. And there are many combinations that I will introduce gradually to you, but in general, creating profits is a combination.

Summary

There are people who have successfully used the Elliott wave pattern in trading. The elliott wave theory still attracts a large following. Including individual investors as well as professional traders. You should also try to understand the feeling, maybe you are in it.

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