For newcomers to forex trading, the technical requirements that are necessary for effective trading appear at first blush to be far too daunting a task to accomplish in a short period of time. That first impression often curbs their enthusiasm, but every profession on the planet requires a learning curve approach to gaining competency. “No pain, no gain” is a true axiom, or you must invest the time to acquire any proficiency with any skill-driven activity. Pattern recognition is at the heart of all of technical analysis, and Elliott Wave Theory, though appearing overly complex, can actually get a beginner started in the right direction.
Ralph Nelson Elliott, born in 1871, spent the latter part of his life developing his unique approach to technical analysis. After an exhaustive study of the DJIA, he concluded that the ebbs and flows of the stock market were in harmony with similar physical actions in nature. He suggested that trends in the market were repetitive in form, but not necessarily in amplitude or time, and from these studies, he developed his predictive methods that are now referred to as the Elliott Wave Principle.
His research has stood the test of time, especially more recently in the high-risk field of online forex trading, and his unique tools continue to predict market movements with a degree of accuracy that surprises and enriches those that take advantage of what his principles have to offer. Like an onion, there are varying levels of complexity, but the basics can be discerned from the following chart example for the “EUR USD” currency pair:
Elliott postulated that the market vibrates in natural rhythms, and that trends unfold in a basic pattern of five waves in one direction, followed by three waves against that trend. In the above chart, a major impulse wave begins in the lower left of the chart with a “1” designating the first leg of the wave. The accompanying “ADX” indicator signifies that the upward movement of the trend is strong since the index value exceeded the “40” level.
Leg #2 is known as a retracement, and the level of pullback equates to 61.8% of the measure of Leg #1. The ratio figure, “0.618”, is noted on the chart, along with dotted lines to indicate how it is formed. This ratio is a common one found in nature, along with 0.382, 0.500, 1.000, 1.618, and others. These figures are known as Fibonacci Ratios, and they may be found in a strand of our DNA, seashell formations, and even in the form of our galaxy. Elliott was the first to correlate these values with market activity.
The “5-count” impulse wave is followed by the “3-count” corrective wave, and so noted with red numbers and letters in the chart. Elliott also combined pattern recognition with many of his studies, and the chart actually shows a classic example of an “Ascending Triangle” forming at the end of the impulse wave. Prices continually test the “flat” resistance line until a breakout from the pattern takes place. Typically, this pattern would favor an upward breakout, but Wave Theory would suggest that a downward wave action was in order, the “A-B-C” portion.
The value of the Elliott Wave Theory is undisputed among expert forex traders. The ability to predict key target prices, to determine typical retracement levels, and to discern the direction that a trend might take are all advantages provided by these principles. Time is required to appreciate the technique and to develop appropriate interpretative skills, while impatience and inexperience can spell failure for any beginner. Invest the time, and reap dividends later.
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