Intoduction to Elliott Wave analysis
Information is not investment advice
What is Elliott Wave analysis all about?
You probably heard something about Elliott waves or even seen wave counts. That's because nowadays Elliott wave analysis becomes one of the most popular approaches of the Forex market forecasting. Why? Elliott Wave Principle is the only tool in our experience, which can sort out the price movement on every timeframe from the Monthly or even Yearly chars to just one-minute intraday intervals. For example, you can trade on intraday charts, but at the same time, you also have a bigger picture. Simply put, Elliott waves are the DNA of the market. In the following articles, we will guide you through the Elliott Wave Principle. Let's go.
Who is the author?
We should say many thanks to Ralph Nelson Elliott (1871 - 1948), who was an accountant and economist. In 1938 he published 'The Wave Principle', and his second book 'Nature's Law - The Secret of the Universe' was printed in 1946. Elliott described patterns that repeatedly form on the market according to very well-defined rules.
We must also thank Robert R. Prechter Jr. and A.J. Frost for the book 'Elliott Wave Principle: Key to Market Behavior', which nowadays is the primary source of rules and guidelines. And furthermore, in 2006 another great book was published – 'Elliott's Code' by D.V. Vozny. Unfortunately for many readers around the world, this book is in Russian.
The begging of the journey
So, this series of articles based on the two books. Any rule or guideline in any article fits the rules in these publications. And rest assured, I'm not going to just retell you the books. The thing, I'm really going to do, is to teach you the Elliott Wave Principle and share my experience. The most examples will be from the real market. Also, we'll go through some cases, which aren't described in the books, but you can find them on the charts.
There're two main things in the Elliott Wave Principle: impulses (five-waves price movements) and corrections (three-waves price movements). We'll come back to this in the next articles, so you'll see that there's just one main LEGO block, which is an impulse. But for now, let's focus on these two ones.
Let's have a look at the chart below. You can see there a 5-wave decline – that's an impulse wave (there're some cases where we could have a 5-wave correction, but I'm going to describe it later). Also, there's a 3-wave advance, which we could consider a correction. Fine, we've just found an impulse and a correction, so it's time to see a little bit bigger picture.
The next chart is just the real wave count, which I posted in my analytics. The decline is likely in the third wave of a bearish impulse, while an upward bounce is the fourth wave of it.
So, we can come to the following conclusion: there's no wave, which could stay apart from the others. The Elliot Wave Principle is like a Russian nesting doll (Matryoshka). Each wave is a part of another wave, but also each wave consists of smaller waves. This story happens from higher to lower timeframes.
And this makes the Elliott Wave Principle different from other techniques of market analysis. The majority of the technical analysis approaches focus on patterns and signals, which stand aside from each other. The power of EWP is an ability to see the bigger picture, not just an individual setup.
You probably heard that if you use the EWP in trading, you will come across more than one possible wave counts. Usually you have a few possible scenarios, which sometimes are contradictory. This is the most exciting about the EWP because it's like playing chess.
If some holy-grail indicator tells you to buy or sell, you wouldn't think what you're going to do if something goes wrong. With the EWP, you are trying to figure out trading actions depending on which wave count is in place. That's a core skill of a successful trader.
Let’s get to some real stories. The first example is the DJI index. In September 2016, the index reached the historical high, and I posted a quite bullish wave count. I expected the market much higher because the fifth wave was far from over.
A few months later, the market climbed even higher, but I was still bullish. This expectation was based on some things in the EWP we're going to learn soon, but for now, you can see how it worked.
So, the trend is still bullish, and you can see the current wave count below.
The second story is USD/TRY. In October 2016, the fourth wave looked finished as a triangle, so I expected another bullish impulse, which developed in the next few months.
Then there was a long story with a bearish correction, which finally ended up, so the bullish trend has been continued as expected.
Finally, in April 2018 there was another bullish moment because of the possible ending of wave 4. So, the market went even higher.
There're bad examples as well. However, speaking of trading, the most important thing is what you’re doing when the market is moving along the trend according to your wave count. So, we can use the EWP as a great tool to find opportunities in the markets.
In addition, there's no obligation for you to trade any wave count you labeled or just seen on the web. You should trade only the best counts when you have a great moment to open a trade. In other words, you should wait for a good call like a hunter in the woods. And when you see the opportunity, then you do the best to trade it most successfully.
It's just the beginning. In the next articles, we're going through the more specific rules and guidelines of the EWP.
2022-10-04 • Updated
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