Guide to the Elliott Waves indicator in Forex trading

The Forex market is home to millions of traders who exchange currencies every second. There are various types of trading strategies. Some use technical analysis, some fundamental analysis, and others use the mixture of these two to predict future prices. Technical analysis is using indicators and patterns.

The Elliott Waves indicator in fx is an important tool for technical traders. The indicator looks for persistent, recurring price patterns that serve to explain the rationale behind the decisions and reactions of short-term traders and long-term investors alike.

Elliott Waves indicator overview

• Elliott Wave theory is a technical analysis method that seeks repeated patterns on a price chart and divides them into predictable waves
• Forex trading Elliott Waves indicator is often used in combination with Fibonacci retracement levels
• The Elliott Wave Oscillator is plotted below the price chart
• The Elliott Wave Oscillator is a lagging indicator
• The oscillator uses 5 and 34-day exponential moving averages as a standard

Technical details of Elliott Waves

To get a better understanding of Elliott Waves indicator for trading fx, it is critical to consider the sequence of waves and the observable patterns that emerge while using the indicator. The special guidelines also help implement the indicator effectively when trading forex.

The Elliott Wave Theory identifies two types of waves – motive and corrective. Unlike other technical indicator strategies, the Elliott Wave Theory can be interpreted differently by traders. It does not represent a strictly linear method of trend analysis.

The basic Elliott Wave sequence consists of five waves of different directions. Most observable patterns can be broken down into motive and corrective waves according to the theory.

Motive waves

The motive wave represents the first half of a typical Elliott wave and is divided into 5 smaller waves. These waves are further subdivided into impulse and diagonal waves.

In a given motive wave, two sub-waves are directed downwards, while three are moving upward. The waves that are moving up are called “actionary” sub-waves, while the pens moving down are called “corrective” sub-waves.

In general, there are three rules in place for motive waves, according to the Elliott Wave Theory:

• The first corrective wave (Wave 2) always retraces less than 100% of the first wave
• Wave 4 always pulls back by less than 100% of Wave 3
• Wave 3 always goes beyond the end of the first wave and is never the shortest of the five waves

Corrective waves

The corrective wave usually consists of three sub-waves – A, B and C. The direction of waves A and C coincides with the direction of the corrective trend, while wave B is traveling in the opposite direction.

Basic Elliott Wave cycle

The combination of motive and corrective waves gives us the basic Elliott Wave cycle. The 5-3 structure is a common occurrence both in bullish and bearish market trends. This 5-3 cycle serves as the foundation of Elliott Wave Theory. When the market is going up, five actionary and three corrective sub-waves can be observed. When the market is going down, five sub-waves are directed downward, while three are directed upward. This cycle alternates constantly, and when one of them ends, another wave begins.

Elliott Wave Oscillator

Elliott Wave Theory has been widely used by financial analysts worldwide. One of the most important tools developed for the theory is the Elliott Wave Oscillator. The EW Oscillator uses 5 and 34-day moving averages to send out signals for the wave formations. Traders can use this information to anticipate the latter sub-waves once a wave formation has been properly established on the chart.

Elliott Wave guidelines

The guidelines for using Elliott Waves are not set in stone rules. However, they tend to be true more often than not.

Some guidelines outlined for Elliott Waves are:

• The guideline of equality – Two of the motive sub-waves are highly likely to be equal in length. In a five-wave sequence, the first and last waves are most likely to be of approximately the same height
• The guideline of alternation – The shapes of waves 2 and 4 will alternate. If wave 2 is a sharp correction, wave 4 will be sideways, and vice versa
• The guideline of alternation within a correction – The shapes of waves A and B will alternate. When wave A is a simple correction, waves B and C are likely to be more complex
• The guideline of depth of corrective waves – When a correction happens, a significant amount of that correction will be directed toward the fourth sub-wave of the previous wave
• The guideline of channeling – The ends of waves 3, 4 and 5 can be projected by drawing trendlines between the beginning and end of each of the waves
• The guideline of scale – Suggests that a combination of arithmetic scale and semi-log charts be used when looking at Elliott Waves

Practical application of the Elliott Waves indicator

In this Elliott Waves indicator example, the five-wave pattern is drawn with a corrective wave included. The larger Elliott Wave formation is not fully finished, however, the fourth sub-wave is likely to retrace before trending upward on the fifth wave. The Elliott Wave Oscillator is also plotted below the chart, which shows an uptick on 11 November – suggesting the momentum is in place for the wave formation to finish.

History and other useful details of Elliott Waves

The Elliott Wave Theory was developed by R. N. Elliott in the 1930s. The indicator was further popularized in the 70s by Robert Prechter. The theory is based on observable patterns that alternate and repeat themselves on the market time and time again. Elliott Wave International is now the largest flagship financial analysis firm that champions the theory to this day.

FAQs on the Elliott Waves indicator in forex

Is Elliott Waves indicator accurate?

he Elliott Wave Theory is based on the principle of recurring observable patterns on financial markets. While the patterns certainly repeat themselves, correctly identifying them can be a challenge – especially for inexperienced traders. Using the Elliott Wave Oscillator can paint a clearer picture of wave formations for traders.

Should I use Elliott Waves indicator for Forex trading?

Elliott Waves are popular in forex trading. The FX market is characterized by frequent and rapid trend change, which makes using EW all the more relevant. Elliott Waves differ from other indicators in the sense that it is a broader theory and not a straightforward technical tool.

Can you make money from Elliott Waves indicator in forex?

Correctly identifying Elliott Waves can help traders make educated guesses about the sequence of upcoming price movements to make profitable trades. Elliott Waves indicator Forex traders use is profitable for some, while others fail to use it affectively. The best way to answer this question is to test it yourself on a demo or micro account and see if it’s the right indicator for you.