Trading Forex markets using Elliott Wave analysis
Technical analysis is a powerful set of tools used by Forex traders for making decisions. It reveals market trends and patterns by using complex mathematical equations combined and shaped as indicators. Despite a large variety of indicators that are used by traders in their setups, some of the indicators are the most popular within the trading community. One of the best known indicators is Elliott Waves, or EW, which enjoys great popularity and its own niche in Forex trading analysis. This article is aimed at outlining the indicator's history, development, and the best ways of application. The EW oscillator usage will also be discussed, supported with links for additional information about wave analysis.
History of Elliot Waves
Elliot Wave mechanism was founded and explained by Ralph Nelson Elliott. The term 'Elliott Wave' means a certain trend or pattern that the stock market follows, usually repeatedly in trade cycles.
Elliot Wave analysis began in the 1930s, when Ralph Nelson Elliott noticed certain patterns of market prices. His method spread among market practitioners, who named it after its founder – Elliott Wave. Calculations are not that important for the methodology, as it is based on the idea of looking at the historical trends on the financial markets – Elliott believed that history repeats itself. Those who support the theory nowadays state that wave analysis Forex can help represent a comprehensive picture of the financial market.
The main reason why these trade cycles repeat in the financial markets is the traders' mass psychology. Those who trade within the markets are all human beings; they often experience very similar concerns and aspirations. This makes them respond as a 'herd' to economic news events. Subsequently, all financial markets, including Forex, see their prices affected by upward and downward swings, also called waves.
Elliott Wave is another indication that mass psychology of traders actually affects changes in the financial markets. In Forex trading, this method of technical analysis is used for better understanding and higher profits.
Trading Forex with Elliott Waves
Elliot Wave is the fundamental concept of Elliot wave analysis or Forex wave analysis, which are used when trading the Forex markets. Forex Elliott wave is one of the numerous Forex advanced strategies applied by traders and investors with the Forex markets. As a rule, EW is used by experts in Forex trading as follows:
·First, they select a certain method of generating Elliott Wave Count
·Then, they wait until the count of "five" for Elliott wave
·The trends are then backed by indicator(s)
·A stop-loss point is decided on
·Forex trading is entered, with stop-loss order
·Optimum profits and stops are considered
·An exit plan is selected to be used in cases of losses
Thus, Forex trading can be altered by Forex Elliot wave analysis in numerous ways. This also implies that Elliott wave analysis can be interpreted in many ways. The options are dependent of Forex investors' demands and their choices of which FX wave analysis methods to practice.
Using Elliott Wave
Given the various options of the methodology, it is not that important which one of the Forex Elliott wave analysis variations are applied by a trader. His or her strength to thoughtfully pursue its trading rules is of greater importance. The rules comprise the following steps:
·Find or chart a dependable technique for understanding the current Elliott Wave count
·Make sure you have a strong trade signal provided by relevant filters appropriately engaged when trading Elliott wave analysis
·Select a proper stop-loss point
·Target at making most profits from the first batch of waves, and consider the last waves as additional opportunities which befall in a stop-loss more often.
Learning how to conduct EW Analysis
Even seasoned traders regularly face arduous periods when applying Elliott wave analysis. Most probably, the method's irregular success rate is caused by high level of subjective thinking involved in its use. So before you start, we strongly encourage that you learn Elliott wave Forex analysis a bit deeper.
There are two different wave patterns in the Elliott wave analysis Forex, which are the five-wave pattern and the three-wave pattern. The five-wave pattern has five different dominant waves within it, those being Wave 1, Wave 2, Wave 3, Wave 4 as well as Wave 5. The second pattern consists of three sub-patterns: Wave A, Wave B, and Wave C. When used, these waves can help secure the greatest results in market analysis.
The Elliott wave Forex analysis is based on certain assumptions, some of which are listed below:
·There are three impulsive waves – they are Wave 1, Wave 3, and Wave 5;
·Out of them, Wave 3 is never the shortest;
·Retraction from Wave 2 is never larger than 100 percent of Wave 1;
·Wave 4 and Wave 1 are always in different price territories;
·In the event of a diagonal triangle, all will be diagonal.
Are there any advantages of EW?
Through the years of its implementation by many traders, this indicator has proven useful to many of them. Still, it should be noted that it's not more than a theory which was not seriously backed with proofs; so many investors disregard Elliott Waves when trading Forex.
However, EW is a strong index not only for Forex analysis, but for stock trading as well. It might turn out ineffective for you, but the only way to find this out is to test it with your trading strategy.
Elliott Wave and other indicators
As a rule, EW is a complementary indicator. It gives traders a good idea of the market and its possible moves. Using EW, investors can adjust placement of stop-losses and taking of profits. This being said, this indicator is not good at giving you exact entry and exit signals. It is suggested that you use EW together with other Forex indicators which are better at spotting the points of entering and exiting the trades, while Elliott Wave can only support that identification. Below you will find information on the best indicators to use together with EW.
Many beginner traders like the MACD indicator, which stands for Moving Average Convergence Divergence. Together with EW, MACD can allow achieving great results, for they are effective when used together. The best utilization of the two indicators is to check for the beginning of the third wave of Elliott.
Relative Strength Index is another indicator to pair with EW, which is also easy to apply. Used together, these two indicators help predicting the strength of the future moves.
Applying EW at MetaTrader4
It's most likely that you are using MetaTrader4 platform for trading Forex. If so, keep reading to learn where to find EW at MT4 and how to implement it into your trades.
Generally, to be able to use EW, a trader needs MetaTrader4 platform account. In case you don't have one yet, apply here for a Demo Account. With it, you will obtain admittance to an account with the virtual money in it. Download and install MetaTrader4 and login to your platform. As soon as you're done, you are ready to use EW. Go to Indicators section and select 'Oscillators.' Elliot Wave can be found under this category.
When applied alone, Forex Elliott Wave Analysis will not make it easier to analyze market patterns. This is why we suggest that you combine Elliott wave analysis in Forex trading with usage of statistics. But before doing so, ascertain that you have figured EW out.
Hopefully, this article gave you some helpful insights into Elliot Wave. EW can assist you with deeper learning and better understanding of the market's behavior. However, this is just a theory, so you also need to practice EW use by probing it on your trading platform. Despite being not easy to apply, Elliot Wave is still very helpful as part of a trading setup. Do not depend exclusively on EW, but make it an assisting or a conformational indicator to the trading strategy you already use.
In case you experience difficulties when using EW indicator, there is Admiral Markets wave analysis section that we have developed as a resource of inspiration and information on the matter. The section provides daily analysis on H1 and H4 time frames. Even if you trade on other time frames, previewing the analysis will be helpful for you to improve your own EW analysis.