The Elliott Wave Theory In Forex Trading

Posted by Nick Niesen on October 29th, 2010

The Elliott Wave Theory that is used in Forex trading is named after a man by the name of Ralph Nelson Elliott, who was around in the nineteen twenties and thirties. Elliott was the person who discovered that stock markets did not behave in a somewhat chaotic manner, which was previously thought to be the case. He discovered that the stock markets traded in a repetitive cycles that were based on the emotions of investors and traders that are caused by outside influences or the mass psychology that is predominant at that specific time. Elliott also explained about how the up and down swings of the mass psychology always resulted in the exact same repetitive patterns, which he then divided into patterns that he designated waves. To claim this observation made by him, Ralph Elliott came up with the name The Elliott Wave Theory.

The pattern that is shown when a trending market moves is what Mr. Elliott called a five three pattern. The first five wave pattern is called impulse waves, and then the last three wave pattern is called corrective waves. During wave one, the initial upward move is taken. This is caused by a small amount of buyers who purchase, and this causes a rise in the price. In wave two, people who originally bought sell their investment, and this causes the price to dip, however, it will not go as low as the start price before it starts being bought again. Wave three is generally the strongest and longest of all the waves. This wave is when the general public notices the currency and wants to purchase it. This causes a price spike which exceeds the price at wave one. Wave four is when more people start to sell again, so the price dips. Wave five is when most people buy, and this is when the price because too much. At this point the ABC corrective waves come in. The three wave pattern is considerd wave counter trends. Letters are used instead of numbers for this three wave set.

According to The Elliott Wave Theory, the Forex market moves in predictable repetitive patterns called waves. A market that is trending moves in a five three wave pattern, with the first five waves are impulse waves, and the last three waves are corrective waves. By understanding what the waves represent in the Forex market, traders and investors can understand how the market is moving and how to maximize their investment while minimizing their risks in the Forex market.

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