Understanding the Elliott Wave Theory in Trading

The Elliott Wave Theory

THAT Elliott Wavesdesigned by Ralph Nelson Elliott, is an approach to technical analysis based on the idea that market movements follow patterns. repeating patterns.

These repeating patterns are represented below waveform and reflects natural tendencies financial markets. Others will call it market breathing or lice.

These waves are divided into two categories, impulses And corrections to predict future movements.

Elliott wave theory is a method based on the idea that market movements follow patterns. repeating patternscalled waves, which can be analyses to predict future trends.

This approach segments market movements into impulses And correctionsthat proposes a model of eight main waves. The Elliott wave theory is widely used, especially in scalpersTo improve entries merchant and their timing. They can just as easily be used for day trading, swing trading and of course any other form of trading.

To fully understand how waves work and know when to use them, it’s important to understand theirs Basic principles, their typologies and their sequences.

Basic principles

Elliott’s theory is based on the idea that markets move in repeated cycleswhich reflects psychological tendencies (bear/bull market psychology) of market participants.

These cycles are identified as “waves” which manifest in predictable sequences (in principle).

elliott waves example rise
Here a bullish structure that can increase the probability of seeing waves with a bullish structure and a bullish market psychology
elliott wave example declineelliott wave example decline
Here a bearish structure, which can increase the probability of seeing waves with a bearish structure and a bearish market psychology

It is important to understand that many traders only focus on graphic configurationsespecially if they shop at short term. Understanding these configurations can prove to be a real anticipatory.

Especially if the strategy is used in combination with other trading strategies and analysis tools. (bollinger, rsi, ichimoku, Fibonacci for example).

The wave sequence

In Elliott Wave theory there is a structure of more waves divided into pulse and correction sequences.

  • THAT pulse sequences (numbered 1, 3, 5) progress in the main trend
  • THAT correction sequences (2, 4) goes against this trend. Generally speaking, it is extremely rare for a movement to be vertical (vector light).
elliott waves impulsive sequences exampleelliott waves impulsive sequences example

THAT impulsive sequences characterized by summits higher and higher. As long as the tops are outdatedcan the upward trend continue.

Elliott wave corrective sequencesElliott wave corrective sequences

THAT corrective sequences characterized by hole lower and lower. As long as the lows get higher and higher, the uptrend can continue.

The under waves

Every main wave consists of sub waves less, following the same impulse and correction pattern. This fractality is at the heart of the theory, suggesting that patterns repeat on different time scales.

elliott wave exampleelliott wave example

Within a general structure we can find a similar structure which makes it possible to strengthen the latter. These small structures allow traders toanticipate movements more important trends.

Trade application

As mentioned above, traders use this theory to forecast market reversals and continuation of trends.

They will thus be able, thanks to the waves, to identify entry points Or Release optimal. Upstream, wave phase recognition helps to determine current trends.

Wave typologies

Elliott wave theory is based on two main categories of waves: impulsive waves and corrective waves.

Impulsive waves

Impulsive waves move along global trend and is typically divided into five (or fewer) sub wavesnumbered from 1 to 5.

These sub-waves can develop both upwards and downwards, depending dominant trend off the market.

Within this category we distinguish between special configurations:

The impulse with extension

It is characterized by an extension of one of the five subwaves (below the second). ONE diagonal structure is displayed, the wave sequence resembles a wedge-like pattern (below in green).

elliott waves example impulse with extensionelliott waves example impulse with extension

Corrective waves

On the other hand corrective waves intervene counterweight to the movements precedents of impulsive waves and tend to be more complex and less predictable.

The zigzag correction

One of the most common types of corrective waves is correction i zigzagwhich consists of three main movements (X, Y, Z) and can be further subdivision in subwaves.

elliott waves example zigzag correctionelliott waves example zigzag correction

Flat corrections

Flat corrections are another type of corrective wave that usually occurs in several sub-waves (below in green) with a lateral consolidation dynamics. The amplitudes of the sub-waves in this model may follow certain proportions compared to the previous wave.

elliott waves example flat correctionelliott waves example flat correction

Corrections in triangles

Finally, triangle corrections are characterized by a balance between forces and a lateral consolidation off the market.

These formations can indicate either a continuation of the current trend or an impending market reversal.

elliott waves correction triangle exampleelliott waves correction triangle example

They are composed of several sub-waves, each of which can be divided into other smaller movements, and often have the form of symmetrical triangles, descendants or ascendants.

These wave patterns are fundamental to analysts who follow Elliott Wave Theory. With flat corrections, triangle corrections will be the ones you find most often.

Advantages and limitations of Elliott Waves

We have summarized the 3 most important ones for you advantage and the 3 most important disadvantages to know about Elliott waves.

Advantages of Elliott Waves

Trend Prediction: This indicator, despite its simplicity, facilitates the anticipation of market directions quite well thanks to the identification of its patterns.

Temporal flexibility: Can be adjusted in the short term (scalping, daytrading) as well as in the long term.

Psychological analysis: This indicator gives you a perspective on behavioral dynamics investors. By observing the weaknesses of a wave for example.

Elliott Wave Limits

Technical complexity: Requires in-depth understanding but also some experience in the markets, making it not necessarily easy to learn for beginners.

Subjectivity: The interpretation of the waves varies, which can lead to divergent or even conflicting analyses.

No infallibility: Not always reliable, especially in volatile markets where standard models may not apply.

Our opinion on Elliott Waves

To put it mildly, while Elliott Waves offer an interesting perspective and can be a useful tool in a trader’s arsenal, they do not skimp on error of judgment and conflicting signals.

One of the basic rules of trading is to always spend 2 tools which allowsavoid mistakes of judgement. Especially in technical analysis.

This strategy also requires interpretation precise and understanding In depth market models. Otherwise, a novice trader can quickly make errors of judgment by only referring to a graphical configuration, which can prove to be misleading.

For the most part, it is a tool that offers significant probability of success despite its ease of use. The indicator is also particularly interesting from a perspective scalping trade.

In conclusion, of course, we invite you to add this strategy to your trading arsenal, but still not to rely exclusively on this repetition model.

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