Ride The Wave - The Elliott Wave Theory For Forex Markets
One of the greatest known and least understood theories of technical analysis in the forex industry is the Elliot Wave Theory. Created in the 1920s by Ralph Nelson Elliot as a method of knowing trends in the stock market, the Elliot Wave theory applies fractal mathematics to movements inside market to make predictions based on crowd behavior. In its essence, the Elliot Wave theory states that the market - in this case, the forex market - moves in a series of 5 swings upward and 3 swings back down, repeated perpetually. But if it were that simple, everyone would be making a killing by catching the wave and riding it until just before it crashes on the shore. Certainly, there's lots more to it.
One of the things that makes riding the Elliot Wave so tricky is timing - of all the major wave theories, it's the only one that doesn't put a time limit on the reactions and rebounds of the market. A single In fact, the theories of fractal mathematics makes it clear that there are multiple waves within waves within waves. Explaining the data and finding the right curves and crests is a unpredictable process, which gives rise to the contention that you can put twenty masters on the Elliot Wave theory in one room and they will never reach an agreement on which way a stock - or in this case, a currency - is headed.
Elliot Wave Basics
Each action is accompanied by a reaction.
It's a standard rule of physics that applies to the crowd behavior on which the Elliot Wave theory is based. If prices drop, people will buy. When individuals purchase, the demand increases and supply decreases driving the values back up. Nearly every system that uses trend analysis to predict the movements of the currency market is based on determining when those actions will cause reactions that make a trade profitable.
* There are 5 waves in the direction of the main pattern accompanied by 3 corrective waves (a "5-3" move).
The Elliot Wave theory is that market activity can be predicted as a series of five waves that move in one direction (the trend) followed by three 'corrective' waves that move the foreign exchange market back to its starting point.
* A 5-3 move completes a cycle.
And here's where the theory begins to become highly complex. Like the mirror reflecting a mirror that reflects a mirror that reflects a mirror, the each 5-3 wave is not only complete in itself, it is a superset of a smaller series of waves, and a subset of a larger set of 5-3 waves - the next principle.
* This 5-3 move then later on divides into 2 subdivisions of the next higher 5-3 wave.
In Elliot Wave notation, the 5 waves that fit the trend are labeled 1, 2, 3, 4 and 5 (impulses).The three correcting waves are called a, b and c (corrections). Each of these waves is made up of a 5-3 series of waves, and each of those is made up of a 5-3 series of waves. The 5-3 cycle that you are analyzing is an impulse and correction in the next ascending 5-3 upcoming series.
* The underlying 5-3 pattern remains constant, though the time span of each may vary.
A 5-3 wave can take decades before it will complete its process - or it may be over in just few minutes. Forex traders who are successful in utilizing the Elliot Wavy theory to trade in the forex industry say that the trick is timing trades to coincide with the beginning and end of impulse 3 to minimize your risk and increase the rate of your income.
Because the timing of each series of waves differs so much, using the Elliot Wave theory is very much a matter of interpretation. Identifying the best period of time to start and stop a trade is dependent on being able to see and follow the flow of larger and smaller waves, and to know when to trade and when to get out based on the patterns you identify.
The key is in uncovering the trend correctly is discovering the right starting point. As soon as you learn to see the wave formats and identify them correctly, according to those who are masters, you will see how they apply in every aspect of forex currency trading, and will be able to use those patterns to trigger your decisions whether you're day trading or in it for the long haul.
Article Source: FxTradingStock.com
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Want to find out more about Forex Trading Success, then visit Devon Reyes's on how to choose the best way on how to trade forex successfully for your business.
by: Devon Reyes
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Date: Wed, 3 Nov 2010
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