Mr. Ralph Elliott wasn’t actually a famous trader who made millions by speculating on the stock market, but rather an accountant who wrote the book The Wave Principal. His theory is based on the market cycles and psychology of stock traders.
The Elliott Wave theory can be applied to any market, including forex and cryptocurrencies.
The Elliott Wave theory is one of the most popular subjects in trading and many traders claim that it actually works, so you better pay attention to this lesson. As a forex trader, you obviously want to know when to enter and when to exit the market. Mr. Elliott’s theory might give you some clues.
Elliott Wave Theory
In his book, Ralph Elliott discusses impulse waves and corrective waves. Impulse waves are actual price movements with the trend, and corrective waves are countertrend moves.
According to Mr. Elliott, when price is moving in a trend, we usually notice three major moves in the direction of the trend and two pullbacks. This is a 5-wave pattern, which might be followed by a 3-wave pattern of corrective waves. For the sake of our waves example, I will use a Bitcoin chart from the second half of 2017.
Smart money. A small group of people decide to invest in Bitcoin because they believe it is a smart investment and the price will eventually rise.
Media takes over. Bitcoin is all over the media, and everyone is talking about cryptocurrencies and blockchain technology. In our example, the third wave is the most extended as more people get involved, but according to the book, the fifth wave is usually the strongest.
Bitcoin to the millions! The job is done, and everyone on the planet wants to buy Bitcoin whatever the price is. Your grandma is talking about Bitcoin, and your dog is also interested in investing. Some analysts are suggesting that Bitcoin might be in a bubble, but who cares? Bitcoin is the future, and we want to buy it!
The 5-wave impulse pattern is followed by a 3-wave corrective pattern. We didn’t talk about Wave 2 and Wave 4 in our first example, but these are obviously the waves where the smart guys cash in.
When you make 1000% profit on your initial investment, maybe it is time to sell. When is the best time to sell? Obviously, when everyone else wants to buy.
Trading Forex with Elliott Waves
While trading forex, you are not actually buying and selling currency. You are interested in the price direction, and you can make profit when the price is either rising or falling. So, you need to know whether the current trend will continue or whether it will reverse.
Applying the Elliott Wave theory to forex charts might make you some profit, but it won’t always be a success. Depending on the time frame you use, you might see 9-wave patterns or 11-wave patterns in the same direction.
So, your job is not just to short EURUSD on the fifth wave but to actually examine the market behaviour.
While writing this article, I was thinking about the big waves in Hawaii. Unfortunately, the Elliott Waves have nothing to do with surfing in Hawaii. It is again studying price action and market behaviour. As a forex trader, your job is to monitor the charts on a daily basis and analyse the waves. It will eventually pay off.