Traders talk of Elliott Waves. So what are Elliott waves? R.N Elliott is famous for discovering the Elliott Wave Principle. This is what R.N. Elliott said, “Practically all developments which result from (human) social-economic processes follow a law that causes them to repeat themselves in similar and constantly recurring serials of waves or impulses of definite number and pattern.”
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R.N Elliott discerned various types of wave patterns and labeled them. Elliott wave analysis tries to separate the price action into a number of waves that give valuable information about the duration of the trend. R.N Elliott discovered that there are basically two types of wave patterns. 1) Impulse waves. An impulse wave consists of five smaller waves. Impulse waves are waves that move in the same direction of the main trend of the market.
So what is an impulse wave? An impulse wave is a wave that moves in the direction of the market trend and subdivides into 5 smaller waves. Waves, 1, 3 and 5 move in the direction of the market main trend. Waves 2 and 4 move against the market main trend! They are called corrective waves.
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2) Corrective waves. The second type of waves is known as corrective waves. Corrective waves consist of two smaller waves. Waves that move counter to the direction of the market trend are known as the corrective waves. Waves therefore can be analyzed in times periods ranging from a matter of minutes to days to months and years.
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So what are these waves 1,2,3,4 and 5? Wave 3 is usually the longest and the strongest wave. In wave 1, the currency pair makes its initial upward move. In wave 2 the currency pair is considered overvalued.
Many traders fail to count the waves when doing Elliott wave analysis. The most difficult part of Elliott wave analysis is correctly labeling and counting the waves. Elliott discovered that each wave whether impulse or corrective subdivides into smaller waves or is part of a larger wave.
You should have by now understood that wave counting is quite subjective. It usually results in as many forecasts as there are Elliott wave forecasters. An incorrect wave count however, will give a wrong forecast. A correct counting of the waves can help the analyst to achieve amazing accuracy in forecasting the market.
Is Elliott wave analysis useful? There are many traders who believe in the Elliott wave principle while there are others who don’t. Some people say that Elliott wave analysis is useful only in hindsight meaning it is not useful in predicting the future course of the market. However, majority of people who have used Elliott wave analysis strongly disagree with this proposition.
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As a trader you should understand what does Elliott wave principle means because you will come across this term in lot of places even if you don’t want to believe in this principle. An understanding of Elliott waves still have value because it brings to the investor a strong historical perspective even if you are not interested in Elliot wave analysis as a trading technique for short term profits.
The law of markets and the law of gravitation are almost similar. Anything that goes up must come down. The same thing applies in the markets. Markets that go up eventually do come down. Markets never go in one direction. The sheer power of the Elliott wave analysis as a forecasting tool creates a great deal of confusion and worry about the market.
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Some people strongly believe in market timing. There are people who say that market timing is the trading method of the 21st century. It is up to you to make a decision whether market timing should be of consideration when you make your own investment decisions. The followers of the Elliott Wave analysis believe that market timing is of critical importance in investment decisions.
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