Elliott Waves Theory In Forex

The Elliott Waves Theory in forex was introduced by Ralph Nelson Elliot. He observed and believed that the movements in the currency trading moved in waves or cyclic patterns based on the psychology of traders and named it as “Elliott Wave Theory”. While studying the forex market, Elliott observed that the markets were not as chaotic as one thought and also noticed that the markets sometimes follow emotional patterns because of some outside influences.

Elliott Waves Theory in forex trading also takes in to consideration the observations made by the Elliott such as the unique characteristics of wave patterns and making predictions on the basis of the patterns in the market. Another assumption on which the Elliott Waves theory in online forex trading works is that market moved in five waves on the upside and three waves on the downside. The price movement forecasting is done by picking out these distinct patterns. The first three waves of the Elliott Waves theory in forex trading online stands for the impulse or the up-waves in a major bull market, while the next waves represent the corrective or minor downward waves within the major bull market.

It is very well known that in forex trading market for every action there is an equal and opposite reaction. If the prices move in upward or the downward direction, it needs to be followed by an opposite movement. The price action is divided trends and corrections or sideways movements whereas the tends represent the general direction of the market, whereas the corrections move against the trend. These movements are labeled as the impulse waves and corrective waves in Elliott Waves Theory in forex trading.

There are numerous forex traders who make use of Elliott Waves Theory in forex to forecast price movement and they have a great success usually. The only issue with the use of Elliott Waves theory in forex is finding and physically labeling the waves. Sometimes, it is really tough to locate where a wave originates and ends, leaving it up for revision over and over again almost rendering the theory useless. The forex traders which use Elliot Wave Theory in forex tends to some rules which they claim that in order to identify the waves correctly, one need to adhere to these sets of rules.

These rules of Elliott Waves theory in online forex trading are defined below:

1. The wave number 2 must not break under the beginning of Wave number 1.
2. The wave number 3 must not be the shortest wave among Wave number 1, 3 and 5;
3. The wave number 4 need not to overlap with Wave number 1, except for wave 1, 5, a or c of a higher degree.
4. The wave number 2 and 4 should unfold in two different wave forms. It is also known as the rule of alternation.

There are numbers of traders who are using the Elliot Wave Theory in forex to forecast price movement in forex; however it can be quite challenging when it comes to identifying the waves.