As an Elliott wave trader I am constantly on the lookout for trend changes and the big opportunities they bring. In every market cycle extremes of bullishness or bearishness overcome the crowd, and every last person piles into the same trade right before the does elliott wave work forex changes! Elliott wave principle tells me to start looking for the exit, To avoid getting trampled by the crowd, when the trend change appears!
Elliott wave analysis, is a lens to view the market in an objective way. The wave principle views the price movements of the market as being part of an overarching pattern. There are three main descriptive features of the wave principle. The patterns are hierarchical, meaning smaller degrees of the pattern link together to construct larger versions of the similar pattern.
The wave principle states that the basic form of market price action is five waves in the direction of the trend and three waves against the trend. Moves in the direction of the trend are labelled 1 through 5 and counter trend moves are labels as letters, usually A,B and C. How can Elliott wave patterns be applied to trading? Here are five areas where the wave principle can help identify the dominant trend.
The Elliott wave model holds that a five wave advance identifies the overall trend as up, and conversely a five wave decline identifies the trend as down. Why is this information of any consequence? The trend is the path of least resistance. If you can identify the trend then you can get on board and Elliott wave analysis will allow you to ride that trend until the end. Below is a daily chart of the Euro Dollar cross rate. You can see wave down marked in black, followed by an ongoing corrective pattern called a contracting triangle which will complete wave soon.
We know from the Elliott wave pattern that this will be followed by a wave down. This wave should be equal in size to wave . The wave model foresees much lower prices for this pair as the trend reasserts itself. The Elliott wave model also identifies counter trend moves. The impulsive trend will unfold in five distinctive waves, which will then be followed by a three wave corrective move. Knowing this will allow a trader to position themselves for when the larger trend resumes. Below is the daily chart of USDJPY.
A very large three wave movement upwards is under way from the lows in 2011 the chart. You can see wave red completed in five waves, wave down in three waves is complete. Wave up is about to begin as I write, and should carry the market above the wave high. While no method of market analysis is perfect, the Elliott wave model does give the practitioner a perspective for possible future action which gives you time to prepare and definite target zones to aim for.