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How to Use Elliott Wave in Trading: Rules & Strategies

INTRODUCTION

Millions of people from all around the world battle to decide what financial assets to buy on any given day. They are having trouble predicting which way the securities will move.

Make money by purchasing the securities as their price rise. Sell short if they think the price of the securities will decline.

The traders employ a multitude of tactics to accomplish all of this. One of the most well-known is using Elliott Waves to evaluate a chart.

TRADER’S ANALYSIS: FUNDAMENTAL & TECHNICAL

The initial popular tactic is fundamental analysis. They take into account the pertinent news and how it will affect the market when doing this. For instance, if the Federal Reserve issues a dovish remark, people sell dollars, and the opposite is also true.

Technical analysis is another often-used tactic. It involves the use of one or more technical indicators offered by the brokers by the traders.

The financial market offers thousands of trading strategies. Among the most popular trading tactics are:

  • hedging
  • scalping
  • support and resistance
  • moving averages
  • Fibonacci retracement
  • horizontal levels

in addition to. Understanding two or three methods and utilizing them in your daily trading is your aim as a trader. You can also always come up with a trading strategy that fits your trading routines.

WHAT IS THE ELLIOTT WAVE STRATEGY

Ralph Elliott accidentally developed the Elliott wave trading strategy when he sought to research market behavior in his older years. Following extensive research and market analysis, Elliott developed the book “The Wave Principle,” in which he shared his ideas.

Elliott thought he had a place in the financial industry because he was an accountant, but he did not find it until he retired at 58.

His theorem is currently one of the most often employed trading methods. Most of the time, traders will combine this tactic with a variety of other tactics, including moving averages, fibonacci, stochastic, and support and resistance, among others.

HOW TO TRADE THE ELLIOTT WAVE

Understanding market psychology, which shows the swing between optimistic and pessimistic modes, is crucial to Elliott’s Wave Strategy (EWS). The market indicators will fluctuate between being bullish and bearish.

When the market is bullish, traders and investors will be eager to go long and increase their profits.
After some time, the traders have buyer’s remorse and sell some of their stock. The market is currently going through a correction period.

TRADE THE ELLIOTT WAVE

 

The 5 Steps of the Elliott Wave

Numerous things are seen in this chart. At the start of the wave, the longs are more willing to take risks, which raises the price.

In the second wave (2), traders begin to act emotionally and sell some assets, which lowers the price of the pair. The adjustment that emerges from human feeling occurs during this stage.

The Bull Run is decided to proceed in the 3 phase, which raises the prices.

The second correction takes place in the following phase, the fourth (4), with the goal of retracing the wave. The instrument is sold by traders.

The price finally settles up towards the pattern’s peak in the fifth wave. However, the wave typically continues after this. The graphic can be expanded to see the next pattern.

TRADE THE ELLIOTT WAVEs

Additionally, a bullish graphic is not a requirement for the Elliott wave theory. The correction will also take place in a market that is quite pessimistic and where investors are unloading particular securities. As was already mentioned, the first step in comprehending a trend is to recognize it.

The Rules Explained

There are several rules that govern the Elliott Wave strategy.

  • As was said above, the first wave begins around where the first wave begins. It is ideal for the first wave to begin at a much lower level. It often begins once the financial asset hits a crucially low point.
  • Regarding the second wave, there is a second rule. Ralph Elliot argued that an asset’s price shouldn’t totally retrace during the first wave. The fourth and fifth waves share the same characteristics.
  • The third wave should never be the shortest is yet another crucial criterion. In most circumstances, it is the longest of the five waves.

The Elliott Wave’s fundamental theory is quite straightforward. It begins when an asset’s price starts to increase and draws some purchasers. As the price increases, some sellers appear and drive it down. Some buyers now begin to close out their trades.

More buyers enter during the third phase, driving the price up. When some buyers begin to sell, the fourth phase develops. Returning purchasers drive up prices in the closing phase.

Following the impulse wave, the price experiences a corrective phase, which typically consists of three stages: A, B, and C.

impulse wave ABC

Elliott Wave in forex example

Including stocks, currencies, indices, and shares, the Elliott wave can be used for a variety of asset types. Typically, the forex market is the most well-liked. The USD/ZAR chart below provides a nice illustration of this.
The Eliot wave pattern can manifest itself when a currency pair is rising or dropping, as you can see.

Elliott Wave in forex example

HOW THE ELLIOT WAVE WORKS

The Elliot Wave pattern operates in a fairly straightforward manner. There are five waves that often occur over either a short or lengthy period of time, as indicated below.
Every chart time, from a minute to a monthly chart, may clearly show the wave. It is crucial that traders take the time to do a multi-timeframe analysis because of this.

An impulse wave, which is a five-step pattern, precedes the beginning of the Elliott wave. A corrective wave, a three-wave pattern, is then used to close it out. The chart below illustrates where in TradingView you may access the Elliot wave drafting tools.

Impulse and correction wave

Impulse and corrective waves are the Elliot wave’s two most crucial components.

A bull market’s five-wave impulse wave cycle takes place throughout this time. The wave’s initial phase, the impulse, begins when an asset’s price begins to rise. The price makes a minor pullback after a while.

impulse wave

The longest portion of the impulse wave is its third phase. When an asset’s price is rising, the market is bullish. The fourth section sees a slight retreat. The price finally starts to increase once more in the final section.

When each of these components occurs, an impulse wave is complete. These cycles are governed by regulations, as was already mentioned.

It’s important to remember that the inverse can also occur. A bearish impulse wave may occasionally begin on top.

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