Elliott Waves System
This is probably what you all have been waiting for – drumroll please – using the Elliott Wave Theory in forex trading!
In this section, we will look at some setups and apply our knowledge of Elliott Wave to determine entry, stop loss, and exit points. Surfs up!
Hypothetical, will-most-probably-be-right scenario #1:
Let’s say you wanted to begin your wave count. You see that price seems to have bottomed out and has began a new move upwards. Using your knowledge of Elliott Wave, you label this move up as Wave 1 and the retracement as Wave 2.
In order to find a good entry point, you head back to the School of Pipsology to find out which of the three cardinal rules and guidelines you could apply. Here’s what you found out:
- Rule Number #2: Wave 2 can NEVER go beyond the start of Wave 1
- Waves 2 and 4 frequently bounce off Fibonacci retracement levels
So, using your superior Elliott Waving trading skills, you decide to pop the Fibonacci tool to see if the price is at a Fib level. Holy mama!
Price is just chillin’ like ice cream fillin’ around the 50% level. Hmm, this could be the start of Wave 3, which is a very strong buy signal.
Since you’re a smart forex trader, you also take your stop into consideration.
Cardinal rule number 2 states that Wave 2 can never go beyond the start of Wave 1 so you set your stop below the former lows.
If price retraces more than 100% of Wave 1, then your wave count is wrong.
Let’s see what happens next…
Your Elliott Wave analysis paid off and you caught a huge upward move!
You go to Las Vegas (or Macau), overconfident that everything you touch is a winner, blow all your forex profits on roulette, and end right back where you started.
There are no Elliot Waves in a casino.
Lucky for you…we have another hypothetical scenario where you can earn imaginary money again…
This time, let’s use your knowledge on corrective wave patterns to grab those pips.
You begin counting the waves on a downtrend and you notice that the ABC corrective waves are moving sideways.
Hmm, is this a flat formation in the works? This means that price may just begin a new impulse wave once Wave C ends.
Trusting your Elliott Wave skills, you go ahead and sell at the market in hopes of catching a new impulse wave.
You place your stop just a couple of pips above the start of Wave 4 just in case your wave count is wrong.
Because we like happy endings, your trade idea works out and nets you a couple thousand pips on this day, which is not always the case.
Summary: Elliott Wave Theory
Here’s a summary of what we covered regarding the Elliott Wave Theory:
Elliott Waves are fractals.
- Each wave can be split into parts, each of which is a very similar copy of the whole. Mathematicians like to call this property “self-similarity”.
A trending market moves in a 5-3 wave pattern.
- The first 5-wave pattern is called impulse wave.
- One of the three impulse waves (1, 3, or 5) will always be extended. Wave 3 is usually the extended one.
- The second 3-wave pattern is called corrective wave. Letters A, B, and C are used instead of numbers to track the correction.
- Waves 1, 3 and 5, are made up of a smaller 5-wave impulse pattern while Waves 2 and 4 are made up of smaller 3-wave corrective pattern.
- There are 21 types of corrective patterns but they are just made up of three very simple, easy-to-understand formations.
- The three fundamental corrective wave patterns are zig-zags, flats, and triangles.
Three Cardinal Rules
There are three cardinal rules in Elliott Wave Theory when labeling waves:
Rule Number 1: Wave 3 can NEVER be the shortest impulse wave
Rule Number 2: Wave 2 can NEVER go beyond the start of Wave 1
Rule Number 3: Wave 4 can NEVER cross in the same price area as Wave 1
If you look hard enough at a chart, you’ll see that the market really does move in waves.
Because the forex market never moves in textbook perfect fashion, it will take many, many hours of practice analyzing waves before you start to get comfortable with Elliott waves.
Stay diligent and never give up!
” You have also learned your lesson this time around so you skip Vegas and decide to use your profits to grow your forex trading capital instead “