Wave analysis is one of the most popular methods for determining the current situation on the market. The basis of this technique of technical analysis are currency charts, on which the price level moves. The price movement on the chart during the analysis is usually divided into sub-waves and waves, which are used to predict the movement of the price level.
If you decide to use Forex wave analysis to determine the current situation on foreign exchange market you need to remember the following rules:
The wave analysis of currency pairs has a rather low degree of formalization, for this reason, the conclusions made using this method of studying the market are subjective. This is because the situation on the foreign exchange market is constantly changing, for this reason, the results of the analysis are relevant only at the time they are received.
During the wave analysis, it is customary to distinguish two main types of waves:
Practice shows that the best moment to create an order is the beginning of an impulse wave, but, unfortunately, it is very problematic to identify its basis. When using an impulse wave for trading, in order to avoid serious losses, it is recommended to set Stop-Loss at its base.
Almost all professional traders use wave analysis to predict changes in the price level, as this method is significantly superior to other analogues in terms of accuracy and efficiency.
Any fluctuations in the price level form waves. At the moment of inception, any trend consists of five waves; in the course of development, it acquires a three-wave structure. After that, the trend can either continue or reverse.
According to wave theory, the longest is the third wave, which is usually denoted by the number "3". It is this wave that provides the most opportunities for creating orders.
In the process of price level movement, impulses always alternate with corrective waves. An impulse always has five waves: waves 1, 3 and 5 move the price level in the direction of the trend, and waves 4 and 2 reflect a correction.
The picture above shows a downward momentum. Waves marked with numbers 5, 3 and 1 move the price level down, and waves marked with numbers 4 and 2 have a direction opposite to the trend and are corrective. For a standard impulse, a situation is typical when the second wave does not go beyond the first, but the fourth behind the third. The exception is situations when such figures as a wedge and a diagonal triangle appear on the chart, since the waves in them intersect mutually. After one impulse ends, it is followed by a correction or a new impulse, which will have the opposite direction. In the picture above, you can see that after the end of the downward impulse, .
In the picture above, you can see the wedge chart pattern, which is usually the first wave of momentum. After a wedge forms on the chart, a powerful price movement occurs.
In the picture above, you can see an example of a corrective wave called "Zigzag", which includes three waves. Usually a zigzag is the second wave of an impulse. After it appears on the currency chart, it can be assumed with a high degree of probability that the price level will soon make a strong jump towards the main trend.
Despite the fact that the method of analyzing the situation on the market described in this article is quite effective and accurate, it cannot be called simple, since the results obtained are subjective and directly depend on the qualifications and experience of the trader. For this reason, it is more suitable for professional traders than for .
If you decide to use the wave analysis of the market for trading in the Forex market, it is recommended to test it on, otherwise, you may incur significant losses due to an illiterate assessment of the situation on the currency chart.
I hope this article will help you become a truly successful trader.
- a graphical method of technical analysis that allows you to evaluate the behavior of market players based on the study of price movement waves. The basic postulates of the system were formulated in the mid-thirties of the last century.
The creator of the theory is Ralph Elliott, but the well-known financier Robert Prechter made an equally important contribution to its development and popularization.
The basis of Elliott's theory is the observation that each trend consists of certain basic sections (waves) that are constantly repeated.
There are two types of waves in the market – impulsive and corrective.
The former move in the direction of the main trend. The latter, respectively, are corrections to them. The main figure of the wave analysis consists, in fact, of one impulsive and one corrective wave (1-2-3-4-5/ABC). It, in turn, is divided into impulsive and corrective waves of a lower order.
Impulse waves are numbered from 1 to 5, corrective - letters A, B and C. According to Elliott's theory, each trend is a combination of these fives and threes.
Any trend lasts until five waves are formed, after which it either unfolds, or corrected. In the latter case, three corrective segments are further formed. In total, within the framework of such a cycle of growth-fall, eight waves occur. If there was a reversal, then we observe two impulse waves formed by ten segments.
Let's break down the structure in the above screenshot. Elliott waves 1,3 and 5 are impulsive. They follow the general trend. Waves 2 and 4, respectively, corrective.
In the correctional structure ABC, the situation is somewhat different. Since this structure is included in the general downward wave (corrective), waves A and C are considered impulse here, and wave B, directed upwards, will be corrective.
Elliott Wave Benefit
lies in the fact that such structures can be found both in an uptrend and in a downtrend. In the latter case, we are talking about a mirror image of the bullish structure. That is, all impulse waves 1,3 and 5 will be downward, and 2 and 4 will be upward corrections. Accordingly, in the corrective wave, A and C will be ascending, and B will be descending.
It is important to note that the trend structure does not depend on time scales.
It is not so difficult to determine by eye five or three areas in any trend. Roughly speaking, anyone who can count to ten can do this. The problem is that two traders analyzing the same chart may very well end up with absolutelyopposing views on its structure. To remove the subjectivity of the visual assessment, the basic rules for the formation of waves were developed. Some of them were created by Elliott himself, some were added later by other theorists.
Let's start by listing the basic rules:
Additional
Based on the above rules, a trader can distinguish between impulse and corrective structures. If the wave meets all requirements, thenit belongs to the first type. If the conditions are not fully met, this is either a corrective structure or an impulse that has not yet formed.
The theory of Elliott waves in practice begins with the construction of a graph. To solve this problem, it is better to use indicators, we will talk about some of them below. Experts recommend using a standard candlestick chart for analysis, as the most informative and objective. Elliott waves on the chart:
Now the trader sees the formation of the market and can guess how it will develop further.
The most common reason for trading the Elliott system is the presence of an impulse wave from a trend reversal point. Positions need to be opened in one of the three driving sub-waves, but you should be careful, as there is always a chance that the selected structure will be part of a larger corrective pattern. After the formation of an impulse wave, it is necessary to wait for the first correction. Its completion is a signal to enter the market.
conservative method
After the movement in the direction of the initial impulse has resumed, a signal line is drawn through the pivot point and the point of the expected completion of the correction. A buy position is opened at the high of the first driving wave. If the price movement has not reached the order and reverses, breaking through the signal line (this happens in the case of a complex correction), you need to make sure that it does not fall below the pivot point. When growth resumes, the line is corrected to a new low.
If the position was opened immediately, you need to continue to follow the signal line. As soon as the price drops and touches it, the deal is closed and a new order is placed at the level of the extreme maximum. You should not be upset if, after touching the "signal", the price curve immediately goes back in the direction of the trend. This is a working moment, which should be treated philosophically, moreover, the resulting loss can still be compensated by a new contract.
Moderate and aggressive methods
The initial conditions for opening a position with a moderate strategy are similar to conservative trading. The difference is that the order is placed at the end point of the corrective wave B. You must always remember that the expected correction may be delayed. Correction of the signal line and exit from the position is carried out according to the same principle as in the previous method. This option is recommended for beginner traders.
With an aggressive strategy, an order is placed only after the breakdown of the signal line. It is believed that the very fact of such an intersection indicates the completion of the structure and the beginning of the formation of a new model.
There is no ideal indicator for building Elliott waves, however, a variety of modifications allows each trader to find the most suitable option for his style. Let's take a look at a few popular tools.
Elliott Wave Oscillator
This is an indicator whose chart displays a histogram (similar to ). The highest peaks correspond to the third driving wave of momentum. It can be used on almost any timeframe, however, too short intervals are not recommended.
When the histogram crosses the zero mark from below / above, a divergence is formed, indicating the completion of the next wave cycle. If at the time of the first corrective movement the oscillator breaks zero in the opposite direction, the formation of wave 3 should be supported by another divergence. If it is absent, we can assume that the starting point of the model is defined incorrectly.
The fall of the histogram by 30-50% relative to the local extremum indicates the end of the third wave and the beginning of the formation of the second correction segment. Divergence also indicates the completion of the process of the formation of the fifth wave - the growth / fall of the price chart is accompanied by a decrease / increase in the bars.
According to the first rule of trading, first you need to wait for confirmation of the final zero crossing. If the trend is up, the histogram of the indicator is displayed above the middle level, if it is down, it is below the middle level. The position is entered after the first divergence. A rising price and a falling oscillator signal a sell, while a reverse divergence signals a buy. You can enter after the corrective movement drops / rises by about a third relative to the first impulse wave. Stop loss is usually placed at the extreme level and the trade is closed immediately after the formation of a new divergence.
Elliott Wave Prophet and Watl
The Wave Prophet indicator is quite popular among Elliott wave traders. With its help, you can not only see completed movements, but also predict the future direction of the price. The wave model on the chart is built automatically. If a trader believes that the initial conditions are determined by the system erroneously, he can always set them himself.
Watl is a handy indicator that not only visually displays wave patterns, but also draws trend lines. The user can see the trends of different timeframes and a forecast of the future trend. As mentioned earlier, the optimal indicator for the implementation of Elliott's theory has not yet been invented. The listed tools can be considered the most effective at the moment, but they are still far from perfect. However, this in no way detracts from their merits and benefits for traders.
Elliott Waves are often criticized. Many opponents of this method believe that there is little practical benefit from it, since it is rather subjective. Moreover, there are opinions of real practicing traders that this type of market forecasting is more likely to cause losses than profits.
What exactly are the critics of wave analysis paying attention to?
First of all, they note that price movements cannot be predicted using such a framework. The price may significantly deviate from the drawn waves. In addition, there is a subjective factor. After all, waves, like other types of graphical patterns, can be seen literally in any formation, if desired.
Some critics note that wave analysis is a method with a lot of nuances that are not clear to most traders. For example, it is not always possible to determine in the process of trading where the waves begin and where they end.
Critics also point out that the best Elliott Waves can only be identified on historical charts. As for working with this theory in practice, it is practically impossible due to a large number factors.
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The main idea of the wave analysis of the Forex market is that the price movement in any market is characterized by a wave-like nature, which allows predicting the development of the situation in the future. Forex wave analysis from the world's leading brokers, provided to the client, helps to calculate preliminary variations in the continuation of the price movement, the minimum and approximate potential of the available options, and knowing the signs of their confirmation - use any of them to make a profit, clearly realizing which wave is taken to make a profit, and lead this particular wave until the close of his trading operation. There are two types of waves: impulse and corrective, as the price movement is divided into two wave groups:
The wave analysis of the Forex market highlights several ways to determine the wave when it is plotted on the chart: at the close of the price, at the maximum price, at the minimum, or by its average value. For novice traders who have just started using the wave analysis of the Forex market, the best way to plot the price on the chart is to connect the maximum price with the minimum, and vice versa, the minimum with the maximum. In this case, the wave designation becomes visible, in addition to everything, the trader quickly masters the skills of charting.
To reduce the risk of losses in Forex wave analysis and to correctly calculate the size of the stop loss, special attention should be paid to the wavelength. Experts of the wave analysis of the Forex market confirm that the longer the impulse waves, the longer, respectively, the corrective ones.
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Today, a wide range of different methods and tools are used to predict the development of the market situation. Among them, a special place is occupied by Elliott wave analysis forex. The basis of this technique is the assumption that the movement of quotes of any asset has a wave character. Conventionally, it can be compared with the ebb and flow in reservoirs. That is, price movements are divided into impulses and corrections, after analyzing which you can choose the optimal time to conquer the market. On this page you will find professional wave analysis from leading Forex brokers for today and longer time frames.
Elliott analysis is actively used in their work by both beginners and more experienced Forex traders. At the same time, forex wave analysis can provide for several different options for determining waves. To solve this problem, the most popular criteria are price closing indicators, the maximum, minimum and average value of quotes over a certain period of time. Today, for the forex market, this technique has a fairly high predictive value. Plus, the actual wave analysis provides an opportunity to work on Forex on any timeframes.
When using this analysis to minimize risk and set the right stop losses, we recommend that you always pay attention to the wavelength. So, for example, the size of corrective waves is directly proportional to the indicators of corrective waves. To save time and get high-quality analytics for studying the Forex market from reliable experts, we advise you to carefully study the fresh and up-to-date Forex Elliott wave analysis from reliable brokerage companies.
