The Principles of the Elliot Wave Indicator

A way of trading in the foreign exchange market is to use the Elliot Wave Indicator. It allows the analysis of overall market activity for a certain period based on trends and market cycles; it is based on the characteristics of a 5-wave pattern. Especially if you are interested in observing price action, trading practices during highs and lows, and the general market behavior, the technical tool may be for you.

About the Elliot Wave Indicator

The Elliot Wave Indicator, developed by an American accountant, Ralph Nelson Elliot, is a fundamental analysis tool. It gives light to the theory that market behavior is just like many aspects in life; it can be predicted as it unfolds in patterns. It states that by studying trends and market cycles, a presumption of incoming events can be achieved.

Particularly, in the Elliot Wave Indicator, the objective is to analyze 5-wave patterns; the concept is that market activity will proceed after experiencing a series of 5 waves. The specific waves to watch out for are the waves #1, #3 and #5; these 3 highs are marked by the lows of waves #2 and #4.

A Few Considerations

The Elliot Wave Indicator isn’t challenging to employ since you can easily identify a series of 5 waves; however, it is important to read a chart correctly. Certain guidelines must be observed, regardless of a wave’s form; waves can be seen in various forms including triangles, flats, and zigzags.

The Principles of Elliot Wave Indicators

4 rules:

  1. Wave #1 – can be retraced by wave #2, but not by over 100%.
  2. Wave #2 – cannot be longer than wave #1.
  3. Wave #3 – cannot be shorter than wave #1 and wave #5.
  4. Wave #4 – cannot overlap wave #1.

 

Dominant & Corrective Waves

According to Ellioticians or Elliot Wave analysts, the Elliot Wave Indicator can show that each of the individual waves in the 5-wave pattern is unique; waves are either dominant or corrective. Since waves have their own characteristic, a technique of using the indicator effectively involves understanding the defining traits of the waves.

Wave characteristics:

  • Wave #1 (dominant) – if in a bearish market, wave #1 is typically positive; if in a bullish market, wave #1 is typically negative.
  • Wave #2 (corrective) – it retests the previous price action and the reliability of wave #1.
  • Wave #3 (dominant) – it is typically the most powerful in the 5-wave pattern; it can reach new highs, and can be higher than wave #1 by around 150%.
  • Wave #4 (corrective) – it is typically the point when price action begins meandering sideways extensively.
  • Wave #5 (dominant) – it yields results that are typically positive, regardless of bullish trading behavior; since it signals the finality of the 5-wave pattern, it comes with the cue for traders to proceed to a buy-in.