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Basics Of Elliott Wave Analysis


Elliott Wave is a technical analysis technique based on the principle that market tends to trade in rhythmic patterns. Elliott Wave analysis makes it easy to identify patterns which in turn help you produce more accurate forecasts.

Do you often find yourself in a position where you are uncertain whether to let a trade run longer or exit it because you do not know where exactly the price is within a trend cycle? This happens to many traders because most technical analysis tools we use are based on market behavior (i.e. lagging indicators) and for obvious reasons these tools lack the ability to identify the position of current price point within a trend cycle.

Imagine being able to tell how far a trend could follow in a certain direction, it can make a whole lot of difference to your trading performance and this is what differentiates Elliott Wave from most other commonly used technical indicators.

Contrary to popular belief you do not have to be an expert in order to efficiently incorporate Elliott Wave with your market analysis techniques. A little time spent in learning the basics of Elliott Wave can reap you huge rewards and it will enable you to trade with more confidence.

Understanding Elliott Wave Principles
Elliott Wave Theory states that each trend cycle consists of two parts called Impulsive wave and Correction wave. Impulsive wave is driven in the direction of a larger trend and is composed of 5 waves numbered 1, 2, 3, 4, 5. Three of these waves (i.e. wave 1, 3 & 5) move strongly in the trend direction and two waves (i.e. wave 2 & 4) are retracements. The other part of the cycle, correction wave, is the retracement of a larger trend and is composed of 3 waves labeled with the letters a, b, c.

Each wave is a part of a larger cycle and is consists of a very similar cycle of which it is part of. This means that Elliott Wave analysis is equally significant for all timescales and its application to your charts can be expected to yield same results whether you are an intraday trader or a position trader.

Applying wave principle to your charts can be the most challenging task. However, there are few rules that must never be overlooked in order to indentify a valid pattern. Some of the most important rules are:

  1. Wave 3 is never the shortest wave.
  2. Wave 2 never moves beyond the point where wave 1 started.
  3. Wave 3 is never the shortest of 3 impulse waves (i.e. wave 1, 3 & 5).
  4. Wave 4 never moves into the wave 1 area.

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