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The Trend is Your Friend: Basic Elliott Waves ExplainedIn this post, I'll be providing an in-depth explanation on Elliott Waves, specifically Impulse Waves and Corrective Waves. I personally use Elliott Waves a lot, and as it seems like the majority of my followers are beginner traders unfamiliar with the concept of waves, I decided to do an educational post on it. The concept of Elliott Wave Counts are extremely technical and advanced, so in this post, I'll only be going over the two most common waves: The Impulse and Corrective Waves Elliott Waves Background Information The Elliott Wave Theory was named after Ralph Nelson Elliott, who concluded that the movement of assets could be predicted by observing and identifying a repetitive pattern of waves. He was able to identify specific characteristics of wave patterns, making detailed predictions based on the patterns. Very simply put, the direction of a trend unfolds in 5 waves (impulse waves) and any correction against the trend takes place in 3 waves (corrective waves). The 5 impulse waves are labelled ‘12345’, and the corrective waves are labelled ‘abc’. *A bear market would show a downward trend, indicating that we’d see five waves down, and three waves up. Smaller patterns can be identified within bigger patterns. As demonstrated in the diagram above, we can see that the impulse and corrective waves in green, are combined to form a larger wave in black, which is also part of a larger wave in red. In technical terms, this is the classification of wave degrees. On Tradingview, the smallest to largest, the degree goes as follows: Miniscule, Submicro, Micro, Subminuette, Minuette, Minute, Minor, Intermediate, Primary, Cycle, Supercycle, Grand Supercycle, Submillennium, Millennium, Supermillennium. The idea of using smaller patterns fit into bigger patterns, can be coupled with the Fibonacci relationship of the waves, offering insight on optimal levels of trade opportunities, and calculations of risk reward ratios (RRR). What are Fibonacci levels? Simply put, Fibonacci levels are a series of numbers discovered by Leonardo Fibonacci, in which a golden ratio (1.681) is derived by dividing a Fibonacci number with another previous Fibonacci number. The Golden Ratio derived through the Fibonacci can be found in predictable patterns in nature from atoms to huge stars in the sky, as nature uses this ratio to maintain balance. Such ratios are very commonly found in the financial markets as well. Elliott Impulse Waves (12345) The Elliott Impulse Wave, which unfolds in 5 waves, has a few guidelines in terms of the rules that must be kept, and references to the Fibonacci ratio. - An Impulse Wave can be subdivided into 5 waves (For instance, the black wave in the diagram is subdivided into smaller green waves) - Wave 1, 3, and 5 are impulsive. - Wave 2 cannot retrace more than the beginning of wave 1 - Wave 3 cannot be the shortest wave of the three impulse waves - Wave 4 cannot retrace below the peak of wave 1 - Wave 5 needs to end with a momentum divergence - In terms of Fibonacci ratios, there is not set answer, but there are some references we need to keep in mind: - Wave 2 is 0.5, 0.618, 0.764, 0.854 of Wave 1 - Wave 3 is 1.618, 2, 2.618, or 3.236 of Wave 1-2 - Wave 4 is 0.146, 0.236, or 0.382 of Wave 3, but no more than 0.5 - Wave 5 can be the inverse 1.23611.618 retracement of wave 4, or 0.618 of wave 1-3, or equal to wave 1. Elliott Corrective Waves (ABC) When referring to corrective waves, this can include the use of other wave counts. In this post, we’ll be specifically looking at a corrective count also known as the Zigzag. - A Zigzag is a corrective 3 waves structure that is counted as ABC - Subdivision of Wave A and C comes in 5 waves - A Zigzag is a 5-3-5 structure (In the diagram above, we can see the black Zigzag waves, which consist of a 5-3-5 wave count in green) - Wave B is 0.5, 0.618. 0.764, or 0.854 of wave A - Wave C is 0.618, 1, or 1.236 of wave A - If wave C is 1.618 of wave A, it can either be a 3 or 5 waves count. Application We can take a look at Bitcoin’s weekly chart as an example of how Elliott Waves work. While I haven’t included the specific counts for simplicity sake, it provides a good idea of how the market moves. Overall, we can clearly see that the trend is bullish. However, prices don’t always shoot straight up without stopping. It breaks out, corrects slightly, and breaks out again. The repetition of impulse waves, and smaller corrective waves, is what completes the uptrend. This is why ‘buying the dip’ is a smart move during a bull market. Corrections are inevitable even in the most bullish market, and taking into consideration the fact that the trend is your friend, such corrections would merely be a buying opportunity. Almost all assets take one step back for two steps forward. This is how the market works according to the Elliott Wave Theory. Limitations Elliott Waves have a critical weakness: it’s extremely subjective. Even while looking at the same chart, traders can count different waves, as it’s difficult to pinpoint the beginning or end of a wave. As with many other tools in predicting the market, it seems that the most common case is that traders are almost 100% accurate, or completely wrong. As such, I personally like to use this tool merely as a reference in weighing out probable scenarios, rather than solely relying on my rather subjective wave count. Final Remarks I tried to dissect the basics of the Elliott Wave theory in this post. The concept itself is extremely advanced, and the explanation I provided above is merely the tip of the iceberg. Understanding Elliott Waves, while it’s not a silver bullet in trading, can help traders understand the overall trend, identify probable scenarios, and calculate optimal risk reward ratios based on wave targets. If you like this analysis, please make sure to like the post, and follow for more quality content! I would also appreciate it if you could leave a comment below with some original insight.
BITSTAMP:BTCUSDEducation
by Michael_Wang_Official
6
AUDJPY, daily tf, Elliott Wave corrective 4th waveHello my friends, I hope everyone enjoy this week and make decent profit. This weekend, i spent some time to analyze pairs for next week to trade. My first trade for next week gonna be AUDJPY pairs. I tried analyzing this pair by adding some fibonacci tools such as fibonacci expansion and retracement. I found some interesting setup as this pair right now hitting strong support of EMA-200 at daily time frame. Insidentally the place where EMA-200 is located was also a horizontal support level and 161.8 fibonacci expansion level. We could conclude that 73.90-74.10 area is an area of confluences. For AUDJPY to drop further, they will need a lot of strenght. In my opinion, bears currently exhausted as AUDJPY has dropped for 10 straight candles / 2 weeks. It is bound to retrace a bit before continue to the downside. Using Elliott Waves theory as the basis, we could say that we're going to see corrective wave which is Wave-4. Wave-3 stopped exactly at 161.8 fibonacci expansion. Wave-4 usually only a quick corrective wave so we will only buy this pair for a short time. It usually end at 23.6-50% fibonacci retracement. Usually it only stopped at 23.6-38.2% retracement so we will only aim between this fibonacci ratio. I am planning to buy AUDJPY at 74.10 when market open next week. Stop loss will be located a few pips below the support. There are going to be 2setups and you can choose which to follow. Buy AUDJPY 74.10 Stop loss 73.80 Take profit for 1st setup is at 74.85 (RR ratio is 1 : 2.5) Take profit for 2nd setup is at 75.40 (RR ratio is 1 : 4.33) If you wanna take profit using the 2nd setup it is wiser to use trailing stop when price pass the 75.00 level. Use only 1-2% risk Good Luck
Long
by HayatoDragonFX
4
GBPUSD, daily tf, wave-5 of Elliott waveHello my friends, Today i am gonna trade GBPUSD as it is now in a very nice area to take a buy position. For this trade, i am gonna be using Elliott wave theory as the base. In my opinion price currently moving on wave-4 which is a corrective wave. We are going to see anoher impulse wave to the upside or Wave-5. The basic rule of Elliott Wave principle is Wave-4 can never go to Wave-1 teritory so we will put our SL slightly below Wave-1 area which is 1.2630. As per this writng, I already took buy position from 1.2690. I am late to write about this position because i was outisde for work purpose and just got time to write this in my laptop. If you want to follow buy you could still enter this as my target is stil way above current price. Buy GBPUSD 1.2690 Stop loss 1.2630 Take profit 1 at 1.2980 Take profit 2 at 1.3310 RR ratio is 1 : 8.7 Use only 1-2% risk Good luck
Long
by HayatoDragonFX