There is a saying that the major key forex strategy to stock market profit is Elliott wave principle. This principle is founded by Ralph Nelson Elliott in the years of the 1930s. Many people believe that the stock market is run rulessly but Elliott sees that this market is run according to repeated patterns. In this topic we will discuss the history of this principle and how this trading strategy is applied to make profits to traders.
Elliott believes that stock price is formed according to the mind of possessing dominances of traders. He sees that this psychological phenomenon is always repeated in some of the same patterns that he calls the waves in the stock market.
Elliott wave principle is like Dow’s theory because both of them found that stock price moves according to a wave pattern. Besides, Elliott knows that stock market run by fractal basis therefore he breaks the analysis in much detailed level. Fractal is a super small repeated mathematical pattern. Elliott finds that the stock price index are formed in the same ways and repeated over time. Then he researches on how these patterns can be used to forecast the price movements in the stock market.
There are several important points in Elliott Wave Principle:
There are five waves represents primary trends that is followed by three adjustmental waves so called 5-3 movement. This 5-3 movement then forms the next higher movement.
As you may see the 5-3 pattern is not change according to any time frame.
The below chart is formed by eight waves (5 up and 3 down) which named 1 to 5 and A to C.
Waves of 1 to 5 makes up an impulse meanwhile wase of A to C makes an adjustment. The five waves will then create a next higher level and the three waves creates the next higher adjustmental degree. The adjustmental waves often show three price movements. A and C are adjustmental directions and B is shown in the opposite direction. Waves numbered 2 and 4 work as corrections. These waves often follow the pattern as below.
In this picture, the impulse is a combination of five waves because A and C move to the direction of the trend. Otherwise, B is the reverse wave, so it is the adjustment waves and consist of three waves. You can see that an Elliott wave is formed by an impulse and an adjustmental wave.
As you know, the 5 moves aren't always go up and the 3 moves are not always go down. For example, when the trend is decreasing the 5 moves will go down.
In case you're interested:
There are 9 degrees in Elliott Wave Principle including Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette and Sub-Minuette
Due to the fact that Elliott wave is a fractal, the waves can be enlarged or narrowed in comparison with the above theory.
To applying this theory, a trader can determine an impulse and the following adjustmental waves and making selling orders or shorten the positions when seeing a reverse in trending.
In short, Elliott Wave Principle is the key to success in the forex market. However traders must know that just because the market is a fractal, it is not the fact that it is simple to predict. Let’s see that the market is a three, it is not easy to foresee the branches will go to which directions. In fact, like any other theory, the Elliott wave principle has its lovers and haters.
One of the reasons of failure is that traders do not know how to read the wave correctly. Without understanding of the waves, you do not know how long a wave needs to be completed. This is the reason why Elliott wave principle is the major key forex strategy for many traders in the world.