The Essential Elliott Wave Basics

Elliott Wave Principle works on the principle that prices have a tendency of moving in waves of five towards the larger trends and waves of three in the smaller ones. When an up trend is in play, one will notice that a three wave decline will follow on the heels of a five wave advance. Each of these patterns has a name and the five-way advance is called the impulse waves and the three wave ones are called corrective waves.

Elliott waves appear on all forms of charts, from those that are based each month right up to those that are one-minute charts. Waves of a lower degree when formed are also part of a higher degree. Elliott waves are often taken into consideration when it comes to currency trading. In such cases, they should be thought of in three degrees – minor, where they are completely visible in a chart of 15 minutes; intermediate, where their presence is seen in hourly charts and finally the major waves that can be seen on daily charts. You will see that the Intermediate waves will have minor waves in them and the major waves will have intermediate ones forming them. If you want to determine a long term market direction, it would be best to make use of major impulse or corrective waves to help you ascertain the direction the long term market is taking.

Put in your trades at the beginning and exit them at the point of intermediate impulse that forms part of the major waves. This again has to be used with the minor waves that are in the intermediate ones. If you want to get into specifics and trade on an hourly basis, then you will need to use daily waves to determine the direction of the existing trend as well as 15-minute waves for timing when you make your trade entries and exits.

The principle of Elliott wave works ideally in markets that have a massive public following. The forex market is really huge and thanks to its size, its enormity and the liquidity with diversity that it offers, there is often a clear display of wave trends. These patterns can be used by a trader to their advantage giving him a high-reward/low-risk or high-probability entry point, depending on the personal preferences that he puts forward.

In the forex market, the Elliott wave system is particularly useful because, major waves are often developed in close conjunction with interest cycle rates of the market. Potentially profitable Elliott wave setups take place almost 50 per cent of the time.