Market Finance Time

Elliot wave theory for Forex technical analysis

July 13, 2009

foreign exchange market
The wave theory of Elliott – a method of a technical expertise of the markets, based on the wave theory of Elliott (Ralph Nelson Elliott), developed in 1930th years. The waves theory of Elliott represents system of empirically deduced rules for interpretation of the market behavior.
Ralph Nelson Elliott published his book (in collaboration with Charles J. Collins) called The Wave Principle (in August 1938). In it, Elliot advocated that, although stock market trends may appear random and unpredictable, they actually follow predictable, natural laws and can be measured and predicted using Fibonacci numbers. It was the new system of analyzing market trends.

Within the limits of “the bull” movement from five waves of Elliott each of waves 1, 3 and 5 is a pulse wave which consists of five waves of smaller degree while waves 2 and 4 are correcting as each of them breaks up to three smaller waves.Subwaves pulse sequence are numbered by figures, and correcting sub waves by letters.
In conformity to all time scales, the theory of Elliott says:
- Market can exist only in two phases: “bull” and “bear”.
- The “bull” is market on which “the bulls”, characterized by increase of quotations.
- “The bear” market – the market on which “the bears”, characterized by decrease in quotations.
- The both phases of the market in the chosen scale are described by 8 wave formation of market movements.
- The first five waves of any phase (are designated by figures) form the basic market movement, pulse. Final three waves (are designated by letters) form the correctional movement directed against the core. The further development along last three waves can lead to change of a phase of the market.
- Etch market wave develops in time by its own laws. The moment of its end, as well as its size, can be predicted with split-hair accuracy if all market waves which have longer time scale are correctly defined and the current condition of the market is precisely defined.
- If the predicted moment of end of a wave or its size does not correspond to earlier certain sizes, then, the initial analysis of waves of Elliott has been spent incorrectly.
There are following rules for interpretation of Elliott’s waves:
- The second wave lifting is never equal to the 100 % of lifting of the first wave. For example, in “the bull” market the second wave low never will fall below of the first wave starting level.
- The third wave in pulse sequence is never the shortest wave, more often it’s the longest.
- The fourth wave never comes to the end in the first wave’s prices range. It puts into shape the graph, but market movement is the same as well as before it, irrespective of the size and duration of its movement.

Entry Filed under: Forex. .