Elliott wave analysis is a difficult tool that requires a certain flair and skill from a trader. What advice can be given to a beginner who is interested in this type of Forex market analysis?
Elliott Wave Theory is a very interesting market analysis tool. Often in various forecasts and analytical reviews, there are concepts of a pulse and correctional wave. Is the wave analysis of the market really so accurate and able to predict further price behavior? To this question, my pessimistic answer has ripened.
THE CHALLENGES OF WAVE ANALYSIS
Firstly, the Elliot wave theory is quite difficult to study. Sometimes it is very difficult to determine the beginning of the first impulse wave, and for some pairs, it is almost impossible.
Secondly, wave theory in its pure form cannot be used. Fibonacci levels are attached to it. But this will not be enough. Technical analysis works closely with wave theory: channels, technical patterns, and support and resistance levels.
Thirdly, the theory of waves is far from perfect: there are no clear rules for execution. Suppose we nevertheless correctly determined the beginning of the first impulse wave, then the second correction wave and the third impulse wave. It is understood that it is the most profitable. But there it was – its size ranges from 0.618 to 2.618 of the length of the first wave. This is a very large spread.
WHAT CAN HELP A BEGINNER?
The only thing that can help us in Forex trading is a knowledge of some of the laws of wave theory:
- The number of sub waves in the impulse wave is 5, and in the correctional wave – 3. This knowledge will help us not to get confused and test ourselves. This can be done on the wave of correction, by counting the number of already formed sub-waves, thereby it is possible to determine the place where the price completes the correction and continues the previous movement.
- Corrections are not long – most often up to 50% of the pulse wave. But there are exceptions when the correction is 100% of the first wave.
- An important sign of the end of the movement is the appearance of a pin bar at the end or beginning of the wave from the Fibonacci level.
- On the fifth final wave, such technical analysis figures as a wedge or a triangle often arise. Moreover, the ascending wedge is always bearish, and the descending wedge is always bullish.
In conclusion, I want to say that the waves are clearly visible in history, but in practice, without significant experience, they are difficult to determine. Knowing that the Elliott waves form a price channel with possible adjustments, it is best to concentrate the beginner’s attention on learning the basics of technical analysis.