Forex and the Elliot Wave Theory

By: Timothy Rohrer
Submitted: 2007-01-17 16:15:09
Print this article | Tell a friend | For publisher | Social Bookmarking
Rating:
 

Ralph Nelson Elliott believed that the Forex market moved in waves or cyclic patterns based on the psychology of traders which he named “The Elliot Wave Theory”. Elliot noticed this pattern in the stock market and saw that the markets were not as chaotic as one thought. Elliot noticed that the markets moved in emotional patterns as a cause of outside influences.

Elliot was able to spot unique characteristics of wave patterns and make market predictions based on the patterns he identified. Elliot believed the market moved in five waves on the upside and three waves on the downside. Picking out these distinct patterns, Elliot was able to successfully forecast price movement. The first three waves of the Elliot Wave Theory represent the “impulse,” or up-waves in a major bull market, while waves two and four represent the “corrective” or minor downward waves within the major bull market.

In the Forex market we know that every action creates and equal and opposite reaction. As price moves up or down, it must be followed by a contrary movement. Price action is divided trends and corrections or sideways movements. Trends show the general direction of the market, while corrections move against the trend. Elliot labeled these, “impulse waves” and “corrective waves.”

In the late 1970’s the Elliot Wave Theory was adopted by Frost and Prechter who later wrote a legendary book on the Elliot Wave Theory. Using Elliot’s methods, Frost and Prechter were able to predict the bull market of the 1970’s and the crash of the stock market in 1987.

Many Forex trades have had great success with Elliot’s Theory on price movement. The only trouble found when using the Elliot Wave Theory is finding and physically labeling the waves. It’s sometimes difficult to find where a wave starts and ends, leaving it up for revision over and over again almost rendering the theory useless. Traders that use the Elliot Wave Theory will tend to differ, claiming that in order to identify the waves correctly, one must follow a set of rules.

Elliot’s theory has been based on emotional patterns that tend to repeat themselves over time. With this being said, in order to identify Elliot’s waves there are some rules to follow. The rules are as follows:

1. Wave 2 should not break below the beginning of Wave 1;

2. Wave 3 should not be the shortest wave among Wave 1, 3 and 5;

3. Wave 4 should not overlap with Wave 1, except for wave 1, 5, a or c of a higher degree.

4. Rule of Alternation: Wave 2 and 4 should unfold in two different wave forms.

Many traders continue to use the Elliot Wave Theory to forecast price movement; however it can be challenging when it comes to identifying the waves.

Tim Rohrer is an established writer and Forex Trader. To learn more about a profitable forex system, visit http://www.forex-investing.us

Article source: Expert Articles

Most Recent Articles in Currency Trading category

  • The Truth About Forex Trading Softwares and Expert Advisors - By: Richard Golman
    This article attempts to show readers many experiences of the author using various expert advisors and automated forex trading systems.This, primarily is to assist readers to make a better and informed decision as regard purchase of highly profitable automated forex trading software. This article will therefore be of immense benefit to aspiring forex traders wishing to take his trading to a new pedestal.
  • How to Pick Optimized Automated Forex Trading Robots and Systems For Maximum Profitability - By: Richard Golman
    This article tries to illuminate the features necessary to look out for before forex traders buy automated trading software. There are many scam forex products out there, but this does not for once suggest there are no profitable ones too. The big question is, how do traders recognize good expert advisors? This is what this article endeavor to address. Read on...
  • Profit in Forex and Make More Money Using Proven Automated Trading Software - By: Richard Golman
    This article attempts to expose the mistakes many traders of the forex market make, and why such mistakes are the culprits responsible for often less-than-glamorous performance of many of these traders. By following the invaluable suggestions articulated in the article, readers will learn the most pertinent lesson in forex trading, what you don't have shouldn't be an obstacle to what you want to have.
  • An Understanding Of Forex Charts Is Essential To The Successful Trader - By: Donald Saunders
    For an increasing number of Forex traders charts are an essential tool in reaching trading decisions and a knowledge of Forex charting and technical analysis is now a fundamental part of any currency trading course.
  • 5 Reasons For Entering The Exciting World Of Currency Trading - By: Donald Saunders
    Currency (Forex) trading is extremely popular with small private investors around the world and this is not surprising when you look at the advantages which this lucrative form of investment provides.
  • Currency Trading Without A Clear Strategy Is The Road To Financial Ruin - By: Donald Saunders
    Many novices are enticed into Forex trading by the promise of high and low risk or risk free returns for a minimal investment and rush head first into trading without any clear plan. As we show here however, currency trading without a clear strategy can be a fast route to financial ruin.
  • A Good Forex Trading Course Is A Must For All Beginners - By: Donald Saunders
    If you are tempted to participate in the world's largest and most liquid financial market and share in the profits which more and more small investors are enjoying today then do not make the mistake of doing so without at least some basic training.
  • The Best Hours To Trade Forex - By: Donald Saunders
    If you are new to the world of forex trading then one question which you will surely be asking, and which we answer here, is just when is the best time of day to trade?
  • Forex Trading Software Is The Foundation Of Successful Trading - By: Donald Saunders
    At the very heart of any forex trader's toolbox is a forex trading software package and understanding the power of this package and choosing the right package is critical to any trader's success.
  • Simulated Forex Trading Can Save You A Fortune - By: Donald Saunders
    There is no better way to learn forex trading than to actually be able to sit at your computer and practice trading in the live environment, but this can be a very costly exercise. Today, however, the advent of forex trading simulators makes this both simple and safe.