In the 1920s, Ralph Nelson Elliott developed the Elliott Wave Theory. He noticed that the financial markets have specific characteristic movements which repeat in perpetuity. As these movements showed peaks and troughs in a cyclical upwards and downwards fashion, he named these movements waves.
While Elliott Wave theory deals with a complex and broad topic. It takes years for practitioners to master it. However, despite the complexity, knowing about certain elements of this theory and incorporating them in daily trading activities can significantly improve trade timing and analytical skills, thereby helping you grow your overall trading career. And here’s how it happens,
Spotting Trend Changes
Corrective and Impulsive waves from the Elliott Wave Theory are used for determining when a trend would change direction. When the stocks are in an uptrend, the price will move down comparatively more than the previous impulsive up, thereby meaning that the uptrend might be over. Usually, the most significant movement invariably occurs towards the trend’s direction. Hence when the corrective waves look similar to the impulsive waves, this means the trend might have changed.
Determining Price Movements
This theory works as a diagnostic tool that can identify potential trade opportunities, offering value by facilitating a structure that organizes price movement information into graphical, easy-to-understand representations. Even beginner traders can incorporate this theory to make more informed strategies with an extensive understanding of the rules of Elliott Wave Theory.
Read More- Components of Option Chart
Forex Trading
Elliott conducted comprehensive stock market predictions depending on the reliable characteristics that he had discovered of the wave patterns. Similarly, Elliott Wave’s popularity has its own benefits. As the theory is deep-rooted in the psychology of the consumers, its relevance in terms of forex trading is comparatively higher when a large traders’ group is observing the patterns and performing their trading functions based on the information retrieved through the theory.
Special Considerations
The Elliott Wave Theory also recognizes the Fibonacci sequence, which denotes the quantity of waves in corrections and impulses. Wave relationships in relation to time and price also usually exhibit 62% and 38% Fibonacci ratios. Moreover, analysts have also developed other indicators inspired by the Elliott Wave principle, such as the Elliott Wave Oscillator. The oscillator offers a computerized method that helps in predicting the direction of future prices. This is determined by understanding the difference between the 34-period moving average and the 5-period moving average. The artificial intelligence system by the Elliott Wave International, also known as EWAVES, applies to every Elliott wave data guideline and rule for generating an automated analysis of Elliott waves.
Wrapping Up
The Elliott Wave Theory is a part of technical analysis of stocks that has its own set of naysayers and fans. Nevertheless, traders who follow this theory religiously are passionate about it. However, one must remember that with this theory, people following it can blame the chart reading instead of the theory itself in case they stumble. Other than that, the interpretation of the length of the cycle is open-ended. Hence, there is definitely more to the waves of the theory than the naysayers think.
