Wave Analysis: The Elliott Method

This article will contain information about the definition of wave analysis. The history of appearance of this phenomenon will be affected. The very essence and application will be revealed. Also talk about the Elliott method and the Forex market.

How did the wave analysis method

Ralph Nelson Elliott is the person who made a significant contribution to the description of the stock market. Being a man with a mathematical mindset, having a rich experience of a successful manager, Elliott was able to summarize information and draw conclusions from this, making practical decisions for the future.

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

The Essence of 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 impulse and corrective waves. One full wave has eight subwaves, or waves of a smaller scale. First, a moving one develops, which has three progressive subwaves, separated by two corrective ones, then a correction phase begins, which consists of three sub-waves: two progressive ones and one corrective one. Thus, the circle of the full cycle of the development of the wave closes.

Fibonacci Numbers and Elliott Wave Theory

Those who apply the wave analysis in trading in financial markets know perfectly well that Elliott laid the numbers out of the mathematical sequence that was discovered by Leonardo Pisansky, who received the nickname Fibonacci. In this sequence, each successive number is formed by adding the two previous ones. It is interesting that various interpretations of this series of numbers are everywhere observed in the world around us. Obviously, that's why Elliot used them in his theory.

Why does it work in financial markets?

Wave analysis of the market, whether it is a stock, commodity or currency market, operates on the same principle. Based on the existing picture, forecasts are made for possible scenarios for the development of events in which Fibonacci numbers are used literally, but more often in percentage terms.

Thus, wave analysis helps to predict the depth of correction relative to the magnitude of the development of the price movement. If the absolute value of the progressing wave is taken as unity, then the main correction zones are equal to its length, roughly speaking, 62%, 50%, 38%. Also there are additional zones in 24% and 76%.

When the correction is over, then the length of the next progressive wave can be postponed from its end point, also using the percentage expression of Fibonacci numbers: 162%, 262%, 424% ...

Although the price movement is not determined by mathematical formulas, the ubiquitous presence of Fibonacci numbers in nature prompted them to apply them to the psychological models of behavior of market participants. Therefore, wave analysis and Fibonacci numbers apply to the numerical development of the movement of quotations, and to a temporary expectation of the achievement of certain indicators by the price, and in other spheres.

The method of Elliott and "Forex"

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

For example, the above percentage values are automatically plotted with the Fibonacci indicator line, and time expectations are displayed on the time zone indicator. Wave analysis in combination with Fibonacci numbers is used in the construction of arcs, fans and extensions.

However, this method has opponents. The main factor that falls under the fire of critics is the subjectivity of the interpretation of the available data. However, it can be said with certainty that this is its advantage. As you know, there is no grail in financial markets precisely because psychology is more present here than mathematics. This is an effective method, but it brings a fairly accurate result only after a long improvement.

The main advantage of the market analysis method is Wave Analysis - a forecast that can with a high degree of probability indicate the price targets, on which one should be attentive to the behavior of the price, to leave the transaction or enter it.

When a new instrument for trading appears in the financial market, it is easier to apply the available methods of analysis and forecasting to it than many years later. This is due to the fact that market makers do not yet have a lot of experience "scratching up" traces of their activities. Wave analysis helps to read their intentions. The dollar-ruble is a relatively young currency pair, therefore the method proposed by Elliott is quite applicable.