ELLIOT WAVES - WHAT ARE ELLIOT WAVES?

Added: (Tue Jan 31 2012)

Pressbox (Press Release) - Chaos is the name of the game on the Forex market. It's extremely volatile, with many price fluctuations in either direction, over and over again. It can be very daunting to jump into the Forex market without any idea of what you're doing, and try to make sense of what you're looking at. That's not to say though that it is total random chaos - people have found patterns in the market. One such method for this is known as the Elliot Wave principle
ELLIOT WAVES

Elliot Waves are waves of price fluctuations on a financial market that follow a specific pattern, which I'll tell you about in a minute. It's all based on the idea that markets move based on the moods of investors, which change in predictable patterns. You can actually predict to some degree exactly how a trend will move because of these moods. Elliot Waves are a way of analyzing those patterns in any time frame and predicting the way the market will move.

WHERE DID ELLIOT WAVE THEORY COME FROM?

In 1938 an accountant named Ralph Elliot wrote a book about these waves called The Wave Principle. Not only did his theory predict stock prices, but all kinds of group behaviours. Elliot Waves apply to pop culture trends as much as they do to market trends. It's especially useful in the Forex market, as there is a very huge amount of data to analyze, and it involves a massive amount of people making trades every second of every day.

HOW DO ELLIOT WAVES WORK?

You will find two types of waves in the Elliot Wave principle - impulsive waves and corrective waves. Impulsive waves push market trends. Corrective waves, as you would imagine, provide corrections to those impulses. In order to fall within the Elliot Wave principle, there is a specific pattern to the way these impulsive and corrective waves behave. Whether you're looking at minutes or decades, you'll see Elliot Waves.

THE SPECIFIC WAVES

There's the five-wave dominant trend and the three-wave corrective trend. In the dominant trend the waves are either moving in a general up (bullish) or general down (bearish) direction. The first wave (Wave 1) is impulsive. The second wave (Wave 2) is corrective, but never to the point that it passes where Wave 1 started from. Wave 3 is impulsive and often the biggest wave of all. It well surpasses Wave 1. The fourth wave (Wave 4) is again a corrective wave, but not does not overlap with Wave 1. The fifth wave (Wave 5) is the final part of the dominant trend. This is the end of the dominant trend and beginning of the corrective trend. The sixth wave (Wave A) is the first part of the corrective trend - a correction that starts the overall trend moving in the opposite direction. The seventh wave (Wave B) is the last impulsive wave, actually a correction of a correction, it's a temporary reversal. The eighth and final wave (Wave C), which is the final correction of the overall trend. It's usually even bigger than Wave A. Inside each wave are many smaller waves that look similar to the overall trend. This is the definition of a fractal.

HOW ARE ELLIOT WAVES USEFUL?

They're good for figuring out when to jump into or out of a trend. They're not magic, and aren't a way to make ironclad predictions about the Forex market (if that was possible, we'd all be billionaires now, wouldn't we?). But they're great for figuring out general market trends.

If you want more info on Elliot Waves or general info on Fx trading, visit my web site at http://elliottindicator.com