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Forex Course

111. Trading Forex Market Using Elliot Wave Theory

Introduction

In all the previous lessons, we understood the terminology and interpretation of the popular Elliot Wave theory. Now we are well-versed with the subject to apply it to the forex market.

The Elliot Wave Theory is a wide concept and can be traded in several different ways. In this lesson, we shall analyze the forex currency pairs using Elliot wave concepts by combining it with some price action.

The best way to trade the Elliot waves

We know that according to the Elliot wave theory, there are two types of waves. There is an impulsive wave pattern made of 5 waves, and a corrective wave made of 3 waves. The impulsive wave is towards the trend, while the corrective wave is basically a pullback for the overall trend.

As a trader, we need to look for trades that payout well along with less risk. So, it is not ideal to trade all the impulsive waves and corrective waves.

Trade setup 1

The setup is to trade the impulsive waves. In the 5-wave impulsive pattern, three waves are along with the trend and two against it. Out of those three impulse waves, the ideal wave to catch is Wave 2. This is because, the Wave 2 is usually the strongest out of the three impulse waves, which significantly reduces the risk on the trade.

Trade Example

After the market makes the first wave, the price starts to pullback. But while the market is retracing, we won’t know where the market will hold and complete its second wave. So, we make use of other tools to determine where the market will resume its trend.

Consider the below price chart. As represented, the market made its first wave. Then, wave 2 began, where the market started to retrace. But, note that, at this point in point, we cannot confirm the end of wave 2. So, to determine the completion of wave 2, we shall be applying the Fibonacci retracement.

In the below chart, the fib retracement has been applied. We can see that the market began to hold at the 50% level. This hence confirms that wave-2 leg has come to an end. Thus, we can prepare to go long in anticipation of wave 3.

In the following chart, we can clearly see that the market held at the 50% fib level and ended up making a higher high, i.e., wave 3.

Trade setup 2

This is the type of setup where we consider the complete 5-3 wave pattern. In the below chart, the 5-wave impulsive pattern is represented with the black trend lines, while the 3-wave corrective pattern is represented by the red trend lines. Since in an Elliot wave pattern, the high of the third corrective wave must be below low of the first wave in the impulsive wave pattern, we can trigger the sell at the area shown in the chart.

This hence concludes our discussion on the Elliot Wave theory. In the next lesson, we’ll summarize this topic for your better understanding and then pick another interesting course.

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Forex Course

108. What Are Corrective Waves & How To Comprehend Them?

Introduction

In the last lesson, we discussed the impulsive waves and 5-wave pattern corresponding to it. A trend is made up of the combination of the 5-wave pattern and the 3-wave pattern. The 5-wave impulsive pattern moves along the original trend, while the 3-wave corrective pattern moves against the trend. In this lesson, we shall discuss the corrective wave and then interpret the 5-3 waves.

Corrective waves

In case of an uptrend, the impulsive waves are towards the upside, and the corrective waves are towards the downside. Continuing with the example mentioned in the previous lesson, the corrective waves are represented in the below figure.

In the above figure, waves a, b, and c represent the corrective waves. The overall trend of the market is up, but corrective waves are against it. In other terms, the 3-wave corrective wave can be considered as pullback for the uptrend.

Note: The 3-wave corrective wave is also referred to as the ABC corrective wave pattern.

Reverse Corrective Wave Pattern

The Elliot wave theory is applicable to both uptrend and downtrend. So, for a downtrend, the impulsive wave faces downwards following the overall trend, while the corrective wave faces upwards. Below is a figure representing the 5-3 wave pattern for a downtrend.

Types of Corrective Wave Patterns

The above illustrated corrective wave is not the only type of corrective wave that occurs. According to Elliot, there are twenty-one 3-wave corrective wave patterns, where some are simple and some complex. However, a trader need not memorize all of them at once. The following are three simple corrective waves that are most occurring in the market.

The Zig-Zag Formation

The zig-zag formations are very steep compared to the regular one and are against the predominant trend. In the three waves, typically, wave B is the shortest compared to wave A and wave C. Note that, the Zig-Zag pattern can happen twice or thrice. Also, the zig-zag patterns, like all other waves, can be broken into 5-wave patterns.

The Flat Formation

As the name suggests, in flat corrective wave patterns, the 3-wave pattern is in the sideways direction. That is, the wave C does not go below wave B, and wave B makes a high as much as wave A. Sometimes, the wave B goes higher than wave A which is acceptable as well.

The Triangle Formation

The Triangle formation is a little different from the other corrective patterns. The difference is that these patterns are made up of 5-waves that move against the overall trend. These corrective waves can be symmetrical, ascending, descending, or expanding.

These were some of the most used corrective patterns used by traders. These must be known to technical traders by default. In the next lesson, we shall discuss another important concept related to the Elliot Wave theory.

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Forex Course

107. Comprehending The Impulsive Waves In Elliot Wave Theory

Introduction

In the previous lesson, we got started with understanding the fundamentals of the Elliot Wave theory. An introduction to impulsive waves and corrective waves was also discussed. This lesson shall go over the concept of impulsive waves.

There are two types of waves in the Elliot theory, impulsive and corrective. And as a whole, Elliot stated that a trending markets move in 5-3 wave patterns. The 5-wave pattern corresponds to the impulsive wave, and a 3-wave pattern corresponds to the corrective wave. And the combination of the 5-wave and 3-wave patterns form a trend.

Formation of Impulsive Wave

The impulsive waves are formed by five waves numbered from 1 through 5. Wave numbers 1, 3, and 5 are motive, i.e., they are the waves that go along the overall trend, while wave numbers 2 and 4 are corrective waves that go against the overall trend. Below is a diagram that represents the 5-wave impulsive pattern.

This is the impulsive wave that is formed in all types of instruments. It claimed that this wave patterns form not only in stocks but on currencies, bonds, gold, oil, etc. as well. Now, let’s interpret each wave in the impulsive wave pattern.

🌊 Wave 1 – This is the first up move in the market. This is typically caused by a handful number of people who think that the currency is at a discounted rate and is the right time to buy.

🌊 Wave 2 – This move is against the previous move. There is a dip in the market as the initial buyers are booking profits, thinking it is now overvalued. However, it does not go down until the previous lows because it is also considered to be at a discount for other traders.

🌊 Wave 3 – Wave 3 resembles the wave 1. This wave is usually the longest and the strongest in terms of momentum. This is because, as the price goes higher and higher, the mass public begins to buy along with the institutional players. Hence, it is stronger than wave 1.

🌊 Wave 4 – After a strong up move (wave 3), some traders start to book profit, assuming the security has become expensive. However, this down-move is not quite strong because there are traders who still believe in the bullishness and hence see this as a discounted price.

🌊 Wave 5 – Wave 5 is when most people start to buy security. This is solely due to panic and is considered to a rat trap. Wave 5 is when the security has reached the news. All traders and investors on the news channels advice the public to buy.

But, in reality, this is when the security is considered to be overpriced. The big investors and institutions begin to short and square off their positions. And the liquidity for it is provided by the mass public.

All these waves together form the 5-wave impulsive pattern. We hope you were able to comprehend this concept of impulsive waves. If not, shoot your questions in the comment section below, and don’t forget to take the below quiz.

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