During 1920s genius named Ralph Nelson Elliott discovered that the stock market, although it was thought to behave in a somewhat chaotic manner, in fact predictable. They traded in repetitive cycles, which is noted as the emotions of investors and traders caused by outside influences. Market is always shown in the same repetitive patterns, which are then divided into patterns he called “waves” (waves). He needed to confirm this observation and so came up with a super original name: The Elliott Wave Theory (Elliot wave theory).
5-3 wave forms (5-3 Wave Patterns)
Elliott showed that a trending market moves in what he called, 5-3 wave patterns. The first five-wave pattern is called impulse wave, and the last 3-wave pattern is called corrective wave. Let’s look at the first five-wave impulse pattern. It’s easier if you look at it as a picture: Here is a brief description of what happens during each wave. But in essence it really does not matter. It can easily be currencies, bonds, gold, oil, etc. The important point is that the Elliott wave theory can be applied to the foreign exchange market.
The section makes its initial rising trend. People who are at once (for different reasons – real or imagined) feel that the share price is cheap so it is the perfect time to buy. This caused an increase in prices.
At this point enough people who were in the original (first) wave discussed that the shares overvalued and take profits .This caused a drop in prices. However, the shares will not fall to its previous lows before again considered a bargain.
This is usually the longest and strongest wave. The section has the attention of the mass public. More people have become aware of the section and want to buy it. This causes the price rises and rises. This wave usually exceeds the highest point made by the first wave.
People take profits because the shares is considered expensive again. That wave is usually weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips”.
This is the point where most people buy shares and is most driven by hysteria. Sounds familiar?
In those moments, you are the CEO of company begins there smiling from the cover of major magazines to buy shares and will try choke you when you disagree with them. Suddenly all the experts for the shares. Again, you know? This is the moment when the shares become the most overrated.
At the same time, on the other hand, begins sales which runs the ABC pattern. And then everyone wonders – who took my money!
5-wave trend is corrected and returned by 3-wave opposite trend. The letters are used instead of numbers to help track correction. See this example of three-wave corrective pattern: Just because I used the bull market in the first case, does not mean that Elliott wave theory does not work in the market bears. The same 5-3 wave pattern might look like this: Another important thing you must know about the Elliot Wave theory is that the wave is composed of sub-waves. See the following picture:
See how the first wave consists of small five-wave impulse, a second wave of the smaller 3-wave corrective patterns? Each wave is always made up of smaller waves. Let’s look at it in the right case:
As you can see, in real life are not perfectly shaped waves. You’ll also learn that it is sometimes difficult to mark the waves, but the more you stare at charts better you will be. And that’s all you need to know about the theory of Elliott wave. Remember: the market moves in waves. According to the theory fifth wave then considered fully complete when complete correction of the above and if the form and size corresponding to the correction that should be followed as long as it is not that far is only in terms of the assumption that the fifth wave is completed, with the proper labeling on the top top or the bottom of the still standing next to the number 12345 or ABC and a questionnaire which means that if you can not cross the top or bottom before the end of the corrective waves long standing assumption that a given wave is completed. Since nothing is ever for sure why this theory must have a retreat in case of price cross the previous top or bottom without completing correction! In any case, the picture is almost well drawn only would disagree with numbering where D than at the end of ABC adjustment shall be indicating that the wave 5 began and we had a wave of 1,2,3 and now we are in the fourth wave of wave 5, we must bear in mind that each has the same structure wave 12345 ABC so that the extension should be wave 5 of wave 5.T We probably or correction quads or five already begun. The conclusion from this is written on the subject essentially only we should always keep in mind that it comes to stock market and nothing is ever 100% secure. Elliott wave theory should never be taken for granted as an independent theory because this theory is to identify recurring pattern and the correct levels are determined using additional tools. After the end of a trend leads to correction which is still an integral part of this trend, and that part I do not take into account as the beginning of a new trend. It is interpreted as a double first wave. From the point of starting a new trend and that level of counting waves of a new trend and also in my opinion this is a classic example of an extended fifth wave (most often the extended fifth wave) where also clear. Correction elsewhere wave compared to the first and third wave projection in comparison to the first one. Below will be processed fourth wave correction with respect to the third and fifth wave projection in relation to the third in relation to the first and third together. I keep looking in the smallest wave structure 12345 ABC and it is sometimes impossible because if we look at global developments are taking place at the theory but on a daily basis is moving market that is easy to lose but can be identified. What is a small time interval with the zone deviations higher.
What is important in the proper impulse trend in regarding corrective waves 2:04 is that they must vary in price and time. Simply put waves 2:04 can not be the same in price and duration. If this is the case then it is not a trend, though perhaps waves and do not overlap. Attached is a drawing of such cases and the second is the data correction fourth wave in relation to the third. Projection of the fifth wave is the most complex and depends directly on the length of the third or the first and third together. The fifth wave is projected compared to the first wave of or in relation to the first and third wave together. It depends directly on the length of the third wave compared to 1. If the third wave of and more as compared to 1, then the fifth wave of the same account only in relation to the first If the third wave of less than compared to the first then the fifth wave count on the length of the first and third waves together The problem with corrections is just that you never know if there will be an ordinary ABC or complex ABCDE… how will that lasts and when it ended. A wave is not defined by a wave B is usually a retracement to A. Wave C is usually higher than in B wave projected from its completion. Wave C usually ends below the bottom of the fourth wave. When the wave C retracing Up trend, more price must not fall below the completion of wave C. If this happens then it is likely a complex correction or reversal of the trend. ABC correction is completed when the price closes above the B and safest when it went over the beginning of a wave, or make a new high. Of course all this under the assumption that the trend comes up for down trend – but the opposite.
Elliott Waves Conclusion
When ask 10 experts in the field Elliot wave where the market currently and what predictions have to get 12 different answers. This is anecdotal but illustrates well the possibility of interpreting the Elliot wave. In my humble opinion, all of them more difficult to interpret and recognize because the market has gone crazy and definitely not moving by any rules which are perhaps valid until recently. In my experience it is used for larger trends and using them is possible to find a possible turning points which is otherwise very difficult.