What is the Elliott’s wave?
Elliott’s wave is a theory that predicts market behaviour discovered by Ralph Nelson Elliott in the late 1920’s. His theory is based on the phycology of the masses creating predictable market cycles. The cycles are made up of “waves” which consist of impulse waves and correction waves, the Elliott pattern is also made up of two overall trends the dominant 1 2 3 4 5 waves then the corrective A B C trend.
Dominant 1 2 3 4 5 trend
Wave 1 is the initial strong impulse wave and beginning of the dominant trend usually started by fundamental news.
Wave 2 starts when the price retraces with people taking there profits after wave 1, this is the first corrective wave.
Wave 3 is the second impulse wave is created by the traders who felt they missed out on the initial wave one and now buy at the new low price created after wave 2 and because of the fear of missing out again, this tends to be the strongest wave.
Wave 4 is formed after an extended wave created at wave 3 with the price now considered overbought, people are now taking there profits after the strong wave 3 forming a second corrective wave 4 retracement.
Wave 5 is the final impulse wave, this is the point everyone talks about the currency pair and the strong trend is has had recently, this causes a final push with traders trying to catch some profits. Now the currency pair is extremely overbought and starts the second A B C corrective trend.
Corrective A B C trend
Wave A is the first of the corrective trend, after the dominant trend the currency is now extremely overbought and traders are now taking there profits.
Wave B traders are buying after the wave A correction but this is short lived as the overall trend is exhausted.
Wave C is is the final move with traders exiting their trades noticing price is now in consolidation and also realising they will not get a better price then they will after wave B.
How to trade the Elliott wave
When trading the Elliott wave its best to wait for the third wave which is the strongest and largest wave. To do this first wait for a strong trend possibly after a fundamental event, this is the first wave, then wait for a retracement which is your wave 2, wave 2 is often measured using the fibonacci tool with 50% and 61.8% as common targets. When wave three is complete this is your time to enter your trade and gain profits from the extended wave 3. To exit the trace wait for a slight retracement creating wave 4 then sell when the price extends past the top of wave 3 forming the peak at wave 5.