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lliott wave theory describes how the financial markets behave. It is one of the best and least understood theories of technical analysis when it comes to forex trading. It was developed in 1920 by Ralph Nelson Elliott as a way of predicting the trends of financial markets. To this day the Elliott Wave theory is one of the first theories of forex trading for beginners to tackle. This theory is applied to any freely traded assets or goods like shares, gold, oil, currency etc. Сlick to read more here.

In an effort to understand the market behaviour, Elliott started to observe the financial markets and their charts to understand the market behaviour. After through observation and analysis, he concluded that the markets undergo mass psychology swings and create a specific wave patterns in price movements. Each pattern has its own implication when it comes to position of the market in the past, present and future.

Elliott wave theory states that any financial market either forex or stock market will move in a series of swings such as 5 swings upward and 3 swings downward. It is not the end there is something that makes trading in financial market much more complicated. Otherwise it would be somewhere traders making a killing by catching the wave and ridding it to make money in the markets. Therefore, there is something more than that.

One most important thing as per the info from MBoxWave that makes trading more difficult for most of the beginner financial market traders is the timing and with respect to this theory compared to other theories is that it does not put a time limit to cycle’s reactions and rebounds. In a mathematical theory, there are multiple waves within the waves which make it more complicated for any trader to catch the ride.

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Elliott wave theory is based on standard rule of physics called every action is followed by a reaction. For example: if there is a drop in prices, people will buy, which will increases the demand in the market driving the prices up. The toughest task is predicting when those reactions will follow the actions that make the trade profitable.

As the Elliott wave theory is defined as series of five waves that move in one direction followed by three downward moves, therefore it is more important to interpret the waves in terms of market actions.

These waves can be interpreted on long term yearly basis and short term hourly market hour chart patterns. When describing the trends of the market with help of Elliott wave theory, the first 5 waves are called impulse waves and last 3 waves are called corrective waves.

In wave 1 the stock makes an initial move upwards. This is caused when few people all of a sudden felt that stock is available at cheaper price and it is a perfect time to buy.

In wave 2 the people who took the exposure in the stock feel that stock is over priced after certain rise in price, so book profits. This causes the stock to go down but will not touch the previous level before people start to buy it again.

In wave 3 the stock attracts the attention of mass public that causes the price to move higher and higher and cross the price mark created at the end of wave 1.

In wave 4 people again start to book profits considering it an expensive and waiting to buy on dips.

In wave 5, this is point where the stock is overpriced and starts shorting the stock which starts the corrective wave.

Corrective wave is one where many people expects the price to go up and make a come back but which is most unusual. At this movement it shows very insignificant moves.

Please note that this article is for educational purposes only and should not be considered financial advice.

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