Discover Some Magic To Beat The Forex: The Elliott Wave Theory For Forex MarketsPosted by Nick Niesen on October 29th, 2010 One of the best known and least understood theories of technical analysis in forex trading is the Elliot Wave Theory. Developed in the 1920s by Ralph Nelson Elliot as a method of predicting trends in the stock market, the Elliot Wave theory applies fractal mathematics to movements in the market to make predictions based on crowd behavior. In its essence, the Elliot Wave theory states that the market ? in this case, the forex market ? moves in a series of 5 swings upward and 3 swings back down, repeated perpetually. But if it were that simple, everyone would be making a killing by catching the wave and riding it until just before it crashes on the shore. Obviously, there?s a lot more to it. One of the things that makes riding the Elliot Wave so tricky is timing ? of all the major wave theories, it?s the only one that doesn?t put a time limit on the reactions and rebounds of the market. A single In fact, the theories of fractal mathematics makes it clear that there are multiple waves within waves within waves. Interpreting the data and finding the right curves and crests is a tricky process, which gives rise to the contention that you can put 20 experts on the Elliot Wave theory in one room and they will never reach an agreement on which way a stock ? or in this case, a currency ? is headed. Elliot Wave Basics ? Every action is followed by a reaction. ? There are five waves in the direction of the main trend followed by three corrective waves (a "5-3" move). ? A 5-3 move completes a cycle. ? This 5-3 move then becomes two subdivisions of the next higher 5-3 wave. ? The underlying 5-3 pattern remains constant, though the time span of each may vary. Because the timing of each sequence of waves varies so much, using the Elliot Wave theory is very much a matter of interpretation. Identifying the best time to enter and leave a trade is dependent on being able to see and follow the pattern of larger and smaller waves, and to know when to trade and when to get out based on the patterns you identify. The key is in interpreting the pattern correctly ? in finding the right starting point. Once you learn to see the wave patterns and identify them correctly, say those who are experts, you?ll see how they apply in every facet of forex trading, and will be able to use those patterns to trigger your decisions whether you?re day trading or in it for the long haul. Like it? Share it!More by this author |