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Elliott Wave Theory, Impulse Waves and Corrective Waves

Elliott Wave Theory, Impulse Waves and Corrective Waves

Ralph Nelson Elliott, is an accountant and was trading expert who wrote his investigation in a book titled as ‘The Wave Principle.’ He researched on the 75+ year’s trade data and analyzed them for long, till he became 66 years old. He concluded that the Forex market traded in a repeating manner; the main reason behind this was the emotions of the market participants.

These emotions were affected majorly by the outside influencers like Bloomberg and CNBC, along with the predominant psychology of the people trading at that time. Elliott explained that the rising and falling prices gets affected by this Psychology and repeats itself after some time.

As per this theory, he considered these market movements as waves and believed that if a trader follows these wave patterns, he or she will identify the next move of trending price. That was the reason, why this theory became so appealing to FX traders. It helped them to determine the respective bottoms and ups of the current price, and also assist them in identifying the potential points where cost is most likely to reverse.

The theory was prevalent among the FX participants, and later Ralph made this bit more personalize and changed its name as ‘Elliott’s Wave Principle.’ Talking about the Wave Theory, Fractals are the structures which can be divided into smaller parts, and each of that part carries the same copy of the parent fractals. One of the main characteristics of Elliott waves is that they are fractals, which means the waves are further divided into smaller Elliott waves.

Impulse Waves

Impulse WavesMr. Elliott was a trading expert, and he proved that the trending market follows in a movement started as a 5-3 wave pattern. The first 5-wave pattern is called impulse waves, and last 3-waves are considered as corrective waves. These are a group of trading waves in which 1, 3, 5 are the motive waves, and 2 and 4 are being called corrective waves. Each one these 5 waves have a specific meaning and the Elliott waves theory is quite useful in Forex market a well. Let’s discuss what does these waves means –

Wave 1 – This wave shows that the demand is rising and going upwards. This impact is caused by limited numbers of people, which suddenly starts buying currency pairs.

Wave 2 – This is the scenario, in which the traders who bought the currency pairs are now considering that the price has overvalued and tends to sell them. Though the price will not reach the initial level, it will get down.

Wave 3 – The strongest and longest wave is the 3rd wave. This wave shows the condition in which the majority of traders have started buying the currency pairs.

Wave 4 – This wave gets drawn by the bullish behavior of traders who have taken their profits out of the running trend.

Wave 5 – Hysterical approach wave, in which the price becomes most overpriced and traders start shortening the patterns.

The wave theory suggests that, in a group of three waves, there will always be one wave which will be most extended than the other two streams.

Corrective Waves

Corrective WavesThe 3-wave countertrends are used for correcting and reversing the 5-wave trends. Herein, one uses alphabets in the place of numerical for the purpose of tracking corrections. We are presenting you an example of corrective 3-wave patterns! One must note that we can use these both in bull as well as the bear market. The 5-3 wave pattern will look like the following: Different Types of Corrective Wave Patterns:

As per Elliott, there exist 21 different corrective ABC patterns. These range from simple to complex patterns.

It is quite easy to understand these 21 varied types of corrective ABC patterns as they are well-categorized into three very easy to comprehend the formations.

So, let's have a detailed insight into these three formations. The below examples apply only to uptrends. However, you can invert them in case you are working with the downward trend too.

Zig-Zag Formation

These types of formation tend to have steeper moves in prices which usually go inversed to the predominant trend. In comparison to Wave A and C, Wave B tends to be the shortest. The zigzag formation can take place twice to thrice in a correction. However, similar to other zigzag wave patterns they would be further broken into a 5- wave pattern.

Flat Formations

These are simple sideways corrective waves which are often equal in length with Wave B thereby reversing Wave A’s move and C by undoing Wave B’s movement. This makes Wave B travel beyond the start of Wave A.

Triangle Formation

These waves are bound through converging and diverging of trend lines. Triangle corrective waves are formed of 5-waves that goes reverse to the sideways fashion. They can either be descending, ascending, expanding or symmetrical.

Fractals: The Elliott Waves present within an Elliot Wave

As mentioned in the previous chapters, Elliot Waves have identical statistical character. So, let’s elucidate the same through pictorial description. It's much easy to learn and understand a theory using pictures rather than just put them up through theory.

Can you view here how the waves numbering 1, 3 and 5 comprise of impulse 5-wave patterns which are smaller in comparison to that of Waves numbering 2 and 4 which consists of smaller corrective 3-wave patterns? Yes, herein you are seeing fractals! It is important to understand that every wave consists of waves that are smaller in the pattern. And more importantly, the patterns tend to repeat themselves.

The Elliott Wave Theory organizes this series in varied categories in the order of the waves starting from the largest wave to the smallest wave with the lieu of making it easy for labeling waves. Here are they:

Grand Supercycle – Multiple-century

  • A Supercycle – 40 to 70 years
  • A Cycle – lasts from 1 to multiple years cumulatively
  • Primary – from fewer months to a some years cumulatively
  • Intermediate – from a few weeks to few months
  • Minor – few weeks respectively
  • Minute – few days respectively
  • Minute – few hours respectively
  • Sub-Minute – few minutes

The Grandcycle waves are formed of Supercycles that are created Cycle Ways, which is formed of Primary Waves that is further made with the Intermediate Waves. This further is formed with Minor waves that are comprises Minute Waves that are lastly get formed with Minuette waves and Sub-minuttee waves. Here is the pictorial image. Sometimes it is difficult to label the waves and it will be much easy to understand as you read further. In further sections, we will learn to trade with the use of Elliott Waves.

Elliott Wave Theory

Ralph Nelson Elliott, is an accountant and was trading expert who wrote his investigation in a book titled as ‘The Wave Principle.’ He researched on the 75+ year’s trade data and analyzed them for long, till he became 66 years old. He concluded that the Forex market traded in a repeating manner; the main reason behind this was the emotions of the market participants. Outside influencers like Bloomberg and CNBC have influence over these emotions. This influential list also has the predominant psychology of the people trading at that time. Elliott explained that the rising and falling prices change due to this Psychology and repeat itself after some time.

As per this theory, he considered these market movements as waves and believed that if the trader follows these wave patterns, he or she will identify the next move of trending price. That was the reason, why this theory became so appealing to FX traders. It helped them to determine the respective bottoms and ups of the current price.

It also assists them in identifying the potential points where cost is most likely to reverse. The theory was prevalent among the FX participants, and later Ralph made this bit more personalize and changed its name as ‘Elliott Wave Theory.’ Talking about the Elliott Wave Theory, Fractals are the structures which can be of smaller parts, and each of that part carries the same copy of the parent fractals. One of the main characteristics of Elliott waves is that they are fractals, which means the waves have further divided into smaller Elliott waves.

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