Wave analysis: Elliott method

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

This article will contain information about the definition of wave analysis. The history of this phenomenon will be touched upon. The very essence and application will be revealed. We will also talk about the Elliott method and the Forex market.

How the wave analysis method appeared

Ralph Nelson Elliott is a man who has made a significant contribution to the description of the stock market. As a mathematical mind with a we alth of experience as a successful executive, Elliott was able to summarize information and draw conclusions from it, making practical decisions for the future.

Watching the history of quotes changes at his disposal, he noticed certain patterns in its development. They were subsequently brought together, resulting in the theory of Wave Analysis. Today, wave analysis has firmly taken its place among the various methods of analysis and forecasting the development of events.

Essence of the Wave Theory

It is based on the observation that the development of the price movement can be divided into certain stages, which successively replace each other. According to Elliott Wave Theory, there are impulsive and corrective waves. One full wave has eight sub-waves, or smaller waves. First, the driving one develops, which has three progressive sub-waves separated by two corrective ones, then the correction phase begins, which consists of three sub-waves: two progressive and one corrective. Thus, the circle of the full cycle of wave development is closed.

Fibonacci numbers and Elliott Wave Theory

Those who use wave analysis in trading on financial markets are well aware that Elliott based his price movement forecasting on numbers from a mathematical sequence discovered by Leonardo of Pisa, nicknamed Fibonacci. In this sequence, each subsequent number is formed by adding the previous two. It is interesting that various interpretations of this series of numbers are everywhere observed in the world around us. Obviously, this is why Elliot used them in his theory.

Why it works in financial markets

Wave analysis of the market, whether it is the stock, commodity or currency market, works on the same principle. Based on the existing picture, forecasts of possible scenarios are built, in which Fibonacci numbers are used in literal terms, but more often in percentage terms.

Thus, wave analysis helps predict the depth of the correction relative to the magnitude of the development of the price movement. If the absolute value of the progressive wave is taken as unity, then relative to itlength, the main correction zones are noted, equal, roughly speaking, 62%, 50%, 38%. There are also additional zones at 24% and 76%.

When the correction is over, you can plot the length of the next progressive wave from its end point, also using the percentage of Fibonacci numbers: 162%, 262%, 424%…

Although the price movement is not determined by mathematical formulas, the ubiquity of Fibonacci numbers in nature prompted to apply them to the psychological models of the behavior of market participants. Therefore, wave analysis and Fibonacci numbers are applied both to the numerical development of the movement of quotations, and to the temporary expectation of the price reaching certain indicators, and in other areas.

Elliott Method and Forex

Today, trading on the Forex currency market is becoming especially popular, so the wave analysis of currency pairs has its followers and even fans. It has its expression in a number of indicators that are built into the MT4 trading terminal, the most common and popular among non-professional traders.

For example, the above percentage values are automatically plotted by the Fibonacci Lines indicator, and time expectations are plotted by the Time Zones indicator. Wave analysis combined with Fibonacci numbers is used to build arcs, fans and extensions.

However, this method has its opponents. The main factor that comes under fire from critics is the subjectivity of the interpretation of the available data. However, it is safe to say that this and hisadvantage. As you know, there is no grail in the financial markets precisely because there is more psychology than mathematics here. It is a valid method, however, it only brings a reasonably accurate result after much improvement.

The main advantage that the market analysis method called Wave analysis has is a forecast that can, with a high degree of probability, indicate price targets at which one should be attentive to the price behavior in order to exit or enter a trade.

When a new trading instrument appears on the financial market, it is easier to apply existing analysis and forecasting methods to it than many years later. This is due to the fact that market makers do not yet have much experience in covering their tracks. Wave analysis helps to read their intentions. The dollar-ruble is a relatively young currency pair, so the method proposed by Elliott is quite applicable.