Elliott Wave Theory Simplified

The ElliotT wave principle was developed by a guy called Ralph Nelson Elliott in the late 1920’s. His theory was that:

• movement in price in the market could be  predicted by identifying a pattern of waves.
• he came to the conclusion that the market moves upwards in five waves and corrects in three waves

The Elliot wave principle is a form of technical analysis and followers of Elliott wave principle use it to analyze the markets and forecast market trends by identifying the highs and lows in price.

This article is simple a  basic explanation of what the Elliott wave theory is all about. It is beyond the scope of this article to explain in detail the complexities of Elliot wave principle as that would take  a lot more writing than this  and therefore,  it is not my fanciful interest to do so, ok?

So you have to put up with the most simplified Elliott wave theory that is explained in here.

WHY STUDY ELLIOT WAVE?

There are forex swing  traders that find elliot wave a useful tool in predicting or forecasting market movements and it is especially useful for swing trading. This is because they believe that the market moves in a pattern…in a series of waves. This is what the elliot wave theory is all about.

 BASIC ELLIOTT 5-WAVE SEQUENCE

There are 2 types of waves:

1. Impulse Wave
2. Corrective Wave

Impulse waves move in the direction of the main trend(or sometimes called larger degree wave).  When the large degree(main trend) wave is up then:

• advancing waves are impulse waves and go go in the same direction as the main trend.
• declining waves are corrective waves and go against(or move against) the main trend.

The chart below shows a 5 wave elliot sequence. The trend in up. Here are important points to note:

1. Waves 1, 3 & 5 are impulse waves? Why? Because they move with the main trend-which is up.
2. Waves 2 & 4 are corrective waves because they move against the main trend.
3. This is a basic impulse advance forms a 4-wave sequence.

BASIC 3-WAVE CORRECTION

Now, a basic corrective wave forms with 3 waves, a, b & c.  Look at the chart below:

• notice that abc is a corrective sequence
• notice also that a & c are impulse waves (they move in the direction of the larger trend)
• wave b is a corrective wave because it moves against the main trend.

COMPLETE8-WAVE CYCLE

What happens when you combine a 5 wave impulse sequence with a 3 wave corrective sequence? Well, you come up with what is known as a complete elliott wave sequence-which is made up of a total of 8 waves. These are divided into two distinct phases:

1. the impulse phase &
2. the corrective phase.

Now, the abc corrective phase represents a correction of the larger impulse phase.

WHY I HATE ELLIOTT WAVE THEORY

I consider myself very advanced in technical analysis but this elliot wave theory just puts me off simply because:

1. how do I know where do I start my count of waves? (Honestly, its pretty damn hard, for me anyway!)
2. the market is never perfect in its movements and when these waves form, how do I know which wave is what?

If elliott wave is your “bread & butter”, my hats off to you! But as for me, I’d like to keep things simple and for me keeping trading simple means:

• trading simple chart patterns
• trading candlesticks
• trading using simple support and resistance trading
• or trading breakouts of support and resistance levels.