Trading Elliott Waves
Elliott Waves Theory
The Elliott Wave theory is a form of technical analysis that looks for recurrent long-term price patterns related to persistent changes in investor sentiment and psychology. The theory identifies impulse waves that set up a pattern and corrective waves that oppose the larger trend.
Early 1900 Ralph Nelson Elliott came up with this theory, he analyzed 75 years worth of stock market data and made a unique discovery the price movement or the price action is not chaotic as ugly as it appears it moves in repetitive cycles which are actually caused by outside influences of investor emotions and the trading psychology of everyone who has an open position at a particular point in time.
What makes up the Theory
- impulse waves
- correction waves
- 3 wave pattern
- 5 wave pattern
- wave cycles and fractals
Analysis how its done
There are 5-3 wave pattern that you must master, and two types of waves which is the impulsive waves and the correctional waves.
- Impulsive waves moves in the direction of the main trend
- Corrective waves moves against the main trend
Fives waves pattern
Waves 1,3 and 5 are impulsive waves and wave 2 and 4 are correctional waves.
Three wave correction
This is a correctional wave sequence on its own that happens just after the 5 wave, wave A and C will be impulsive and wave B correction.
Which makes the waves to be 8
Considerations when trading the waves
- Wave two cannot go below the low of wave one if this happens and there is a break you need to restart your recount.
- Wave three should be the longest of the three impulse moves it never should be the shortest.
- Wave four cannot overlap wave one which basically mean the low of wave four can not go below the high of wave one, when it happens you need to start over.
- When the wave number three is the longer wave then wave five must be equal to wave one
- After the five wave cycle impulse advance the correction ABC usually end in the range of prior wave four.