Post on Elliot Waves as a method of technical analysis
Elliot Waves is the author's theoretical development, which represents the development process with all its changes in our society and in the financial markets in particular through the formation of special recognition models.
Elliott waves can be interpreted as a graphical method of technical analysis, thanks to which it is possible to assess the behavior of market participants by studying the direct price waves of movement.
Each trend has its own structural sections, called waves, and they are often repeated. It is customary to distinguish two types of waves - impulsive and corrective.
Impulse patterns are characterized by movement along the main trend, while corrective ones show the adaptation of movement under them. The key analytical figure is presented as a combination of an impulsive and corrective wave. Schematically, this is indicated as 1-2-3-4-5/ABC. Then there is a division into lower-order waves.
All waves of the impulse type are indicated by numbers from 1 to 5, and the corrective ones are assigned the letter A, B and C. As Ralph Elliot stated in his theory, in each trend there is a combination of fives and triples, that is, a combination of impulse and corrective patterns .
five wave model
Market price movement is displayed in the form of 5 waves. The first, third and fifth are waves of directional movement, that is, impulse ones. The second and fourth are the waves of the opposite movement, that is, corrective, or rollback.
The author of the theory attributes three invariable properties of the five-wave model:
1. the second wave never crosses the starting point of the first wave;
2. the third wave is never characterized by the shortest length of all five;
3. The fourth wave can never enter the price territory of the first wave.
Benefits of Elliot Wave Theory
The main advantage, which is also a unique characteristic, of this method of technical analysis is that such structures are formed both in an uptrend and in a downtrend.
If we consider the second case, when the market belongs to the bears, then the market situation will be a mirror image of the bullish structure:
impulse waves 1-3-5 become descending;
waves 2-4 are ascending corrective ones;
A and C become corrective ascending, and B becomes corrective descending.
It is important to take into account the fact that the structure of the trend is not tied to the time frame, so the intervals cannot affect the formation of waves in any way.
Elliot waves and their graphical interpretation
It all starts with charts, so you need to use indicators to apply wave theory. It is best to display the chart in the form of Japanese candlesticks, which combines informativeness and objectivity.
On the chart, the wave structure looks like this:
We open deals using the conservative method
When the movement towards the original impulse resumes, we draw a signal line through the pivot point and the point of the expected end of the correction.
It is appropriate to open a long position at the maximum of the first wave of movement. If the price chart has not reached the level of the order and its reversal begins with the breakdown of the signal line, then you are monitoring its behavior so that the fall does not reach the pivot point and below. When the growth resumes, the line will be corrected relative to the new minimum level.
If you placed an order right away, you continue to monitor the behavior of the signal line. When the price reaches and touches this level, it is necessary to close the deal and place a new order, the level of which will correspond to the extreme maximum.
How are indicators used in Elliot Wave trading?
There is no ideal indicator that can quickly and effectively form a wave cycle. Now it offers a wide range of different modifications, and traders can choose the instruments that suit their strategy and their financial goals.
The most popular indicators for technical analysis and detection of wave structures are:
Elliot Wave Oscillator
Elliot Wave Prophet;
watl.
Consider one of them
Elliot Wave Oscillator
This indicator displays a histogram, reminiscent of MACD. The highest peaks will correspond to the third driving wave. It can be used to analyze any time frame, but it is better not to use it if you trade on too short time intervals.
When the histogram crosses the zero mark in the direction from below or above, a divergence will appear, which signals the end of the next wave structure.
When during the first corrective movement the oscillator breaks through the zero level in the opposite direction, then the creation of the third wave should be confirmed by a new divergence. If it does not occur, it means that the calculation of the starting point of the model was incorrect.
Conclusion - Robert Prechter noted that Ralph Elliot never thought about why the market formed such a "5-3" wave pattern. He focused on data analysis and drew appropriate conclusions, acting on the principle that everything is explained by the cause of the inevitable cycles inherent in the nature and psychology of the crowd.
Elliott waves should be treated as a theory, not a full-fledged technical method of analysis with guaranteed performance, while not forgetting the subjective factor. Accurate wave forecasting takes a lot of practice and experience.
Elliott waves can be interpreted as a graphical method of technical analysis, thanks to which it is possible to assess the behavior of market participants by studying the direct price waves of movement.
Each trend has its own structural sections, called waves, and they are often repeated. It is customary to distinguish two types of waves - impulsive and corrective.
Impulse patterns are characterized by movement along the main trend, while corrective ones show the adaptation of movement under them. The key analytical figure is presented as a combination of an impulsive and corrective wave. Schematically, this is indicated as 1-2-3-4-5/ABC. Then there is a division into lower-order waves.
All waves of the impulse type are indicated by numbers from 1 to 5, and the corrective ones are assigned the letter A, B and C. As Ralph Elliot stated in his theory, in each trend there is a combination of fives and triples, that is, a combination of impulse and corrective patterns .
five wave model
Market price movement is displayed in the form of 5 waves. The first, third and fifth are waves of directional movement, that is, impulse ones. The second and fourth are the waves of the opposite movement, that is, corrective, or rollback.
The author of the theory attributes three invariable properties of the five-wave model:
1. the second wave never crosses the starting point of the first wave;
2. the third wave is never characterized by the shortest length of all five;
3. The fourth wave can never enter the price territory of the first wave.
Benefits of Elliot Wave Theory
The main advantage, which is also a unique characteristic, of this method of technical analysis is that such structures are formed both in an uptrend and in a downtrend.
If we consider the second case, when the market belongs to the bears, then the market situation will be a mirror image of the bullish structure:
impulse waves 1-3-5 become descending;
waves 2-4 are ascending corrective ones;
A and C become corrective ascending, and B becomes corrective descending.
It is important to take into account the fact that the structure of the trend is not tied to the time frame, so the intervals cannot affect the formation of waves in any way.
Elliot waves and their graphical interpretation
It all starts with charts, so you need to use indicators to apply wave theory. It is best to display the chart in the form of Japanese candlesticks, which combines informativeness and objectivity.
On the chart, the wave structure looks like this:
We open deals using the conservative method
When the movement towards the original impulse resumes, we draw a signal line through the pivot point and the point of the expected end of the correction.
It is appropriate to open a long position at the maximum of the first wave of movement. If the price chart has not reached the level of the order and its reversal begins with the breakdown of the signal line, then you are monitoring its behavior so that the fall does not reach the pivot point and below. When the growth resumes, the line will be corrected relative to the new minimum level.
If you placed an order right away, you continue to monitor the behavior of the signal line. When the price reaches and touches this level, it is necessary to close the deal and place a new order, the level of which will correspond to the extreme maximum.
How are indicators used in Elliot Wave trading?
There is no ideal indicator that can quickly and effectively form a wave cycle. Now it offers a wide range of different modifications, and traders can choose the instruments that suit their strategy and their financial goals.
The most popular indicators for technical analysis and detection of wave structures are:
Elliot Wave Oscillator
Elliot Wave Prophet;
watl.
Consider one of them
Elliot Wave Oscillator
This indicator displays a histogram, reminiscent of MACD. The highest peaks will correspond to the third driving wave. It can be used to analyze any time frame, but it is better not to use it if you trade on too short time intervals.
When the histogram crosses the zero mark in the direction from below or above, a divergence will appear, which signals the end of the next wave structure.
When during the first corrective movement the oscillator breaks through the zero level in the opposite direction, then the creation of the third wave should be confirmed by a new divergence. If it does not occur, it means that the calculation of the starting point of the model was incorrect.
Conclusion - Robert Prechter noted that Ralph Elliot never thought about why the market formed such a "5-3" wave pattern. He focused on data analysis and drew appropriate conclusions, acting on the principle that everything is explained by the cause of the inevitable cycles inherent in the nature and psychology of the crowd.
Elliott waves should be treated as a theory, not a full-fledged technical method of analysis with guaranteed performance, while not forgetting the subjective factor. Accurate wave forecasting takes a lot of practice and experience.
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