Elliot Wave
Elliott Wave Principle is a form of technical analysis that some traders use to analyse financial market cycles and forecast market trends
Elliot wave were discovered by the professional accountant, Ralph Nelson Elliott (1871–1948). He stated that prices move in waves. These waves repeat in cycles over and over again. The waves are:
(1) move up, (2) partial retracement, (3) Move up, (4) retracement, (5) the final move up. Then starts the retracements cycle: (A) Full retracement (b) partial retracement, (c) a full move downward. Then the two cycles start again. Look at the Spread betting example below to see the cycles. This picture was taken from Steve Nison’s book: “Japanese Candlestick Charting Techniques”.
Below you can see the various cycles. The Elliot Wave cycle repeats in both macro and micro time frames, as you can see above:
- GrandSupercycle
- Supercycle
- Cycle
- Primary
- Intermediate
- Minor
- Minute
- Minuette
- Sub-Minuette
Let’s go through a Spread trading example of how the Elliot waves are applied to spread betting strategies:
How to spread bet with the trade the Elliot waves:
Elliott Wave is based on crowd psychology. There are two types of waves the impulsive wave and corrective wave, booms and busts, rallies and retracements.
The Elliot waves tell traders where trends are likely to stop or come to a halt, and these are areas where they take advantage of placing their buys or profit areas.
The chart above illustrates the Elliott Wave pattern applied to EURUSD.
As the A,B,C corrective Waves finish we have the first leg upwards 1. When the upward movement seems to have finished ad starts turning the traders look at putting their buy orders at the 38% retracement, and looking for an upward extension of the wave 3. In the EURUSD above, the prices bounced off the 38% retracement moved a little higher, then came back down and stopped out the traders that had bought at the 38% retracement. The spread betters decide now to wait for the 50% retracement and place their buys again. At the 50% retracement they are looking to do the same trade, run it until the extension of wave 3, which is 1.618 projection upwards. The Elliot waves are based on the Fibonacci levels. Once money has been made, they wait for the 38% retracement again at level 4. After the last move higher finishing in wave 5. Traders are expecting now a corrective wave.
Spread betters would now not go against the trend but wait for a retracement of the first A wave down, at point B (retracement) and Short the EURUSD on the C leg all the way down to 100% retracement. On the other hand, Some spread betters wait for the C wave to complete then trade long. They would use the 61% (golden Fibonacci ratio) and 100% retracement to see/expect where the wave will end.
Further reading would be the Fibonacci Levels
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