Wave analysis in Forex is not for beginners. All about wave analysis. Wave analysis of the Forex market Market forecasts with wave analysis

– a graphical method of technical analysis that allows you to evaluate the behavior of market players based on studying the waves of price movement. The basic postulates of the system were formulated in the mid-thirties of the last century.

The creator of the theory is Ralph Elliott, but the famous financier Robert Prechter made an equally significant contribution to its development and popularization.

Description of Elliott Wave Theory

The basis of Elliott's theory is the observation that every trend consists of certain basic sections (waves) that are constantly repeated.

There are two types of waves on the market – impulse and corrective.

The former move in the direction of the main trend. The second ones, accordingly, are corrections to them. The main figure of wave analysis consists, in fact, of one impulse and one corrective wave (1-2-3-4-5/ABC). It, in turn, is divided into impulse and correctional waves of the lower order.

Impulse waves are designated by numbers from 1 to 5, corrective waves by letters A, B and C. According to Elliott theory, each trend is a combination of such “fives” and “threes”.

Any trend lasts until five waves are formed, after which it either unfolds, or is being adjusted. In the latter case, three correction segments are then formed. In total, eight waves occur within such a growth-decline cycle. If a reversal occurs, then we observe two impulse waves formed by ten segments.

Let's break down the structure in the above screenshot. Elliott waves 1,3 and 5 are pulsed. They follow the general trend. Waves 2 and 4, respectively, correctional.

In the correctional structure ABC, the situation is changing somewhat. Since this structure is part of a general downward wave (corrective), waves A and C are considered impulse here, and wave B, directed upward, will be corrective.

Elliott wave advantage

is that such structures can be found in both upward and downward markets. In the latter case we're talking about about the mirror image of the bullish structure. That is, all impulse waves 1,3 and 5 will be downward, and 2 and 4 will be upward corrections. Accordingly, in the correctional wave A and C will be upward, and B will be downward.

It is important to note that the structure of the trend does not depend on time scales.

Video - Elliott Waves

Elliott wave rules

It is not so difficult to identify five or three areas in any trend by eye. Roughly speaking, anyone who can count to ten can do this. The problem is that two traders analyzing the same chart may well come to absolutelyopposing opinions regarding its structure. To remove the subjectivity of visual assessment, the basic rules for wave formation were developed. Some of them were created by Elliott himself, some were added subsequently by other theorists.

Let's start by listing the basic rules:

The second wave of the impulse should not fall to the level of the starting point of the first wave. If this happens, then it is worth questioning the very fact of trend development.
The third wave of the impulse must exceed the extremum of the first. In addition, it cannot be the shortest of the three pulses if we are talking about large-scale time periods.
The fourth wave of impulse cannot fall below the extreme of the first. This rule is sometimes neglected in real market trading, but in such cases the following condition must be met.
The fifth wave of the impulse should be above the extremum of the third.

Additional

Corrections within an impulse must differ in complexity, nominal size or formation time. If there are no differences in at least one of these parameters, the development of the trend should be questioned. There is a possibility that some complex correction model is being formed at the moment.
In a pulse structure that meets all the requirements, one of the driving waves must be extended, that is, exceed the other two in nominal size.
Three adjacent waves that are part of the impulse must be formed at different times.

Based on the above rules, a trader can distinguish between impulse and correction structures. If the wave meets all the requirements, thenshe belongs to the first type. If the conditions are not fully met, it is either a correctional structure or an impulse that has not yet formed.

If the third wave is larger than the fifth and first, then the latter will be approximately equal in length. This recommendation may be useful when analyzing the end of the fifth wave. Even if the fifth wave is longer than the third, and the third is longer than the first, we will still be able to calculate the end of the fifth wave. To do this we need the top of the fourth wave.
In the process of observing wave structures, another interesting pattern was revealed - the sizes of correctional waves 2 and 4 can be different, and they alternate from time to time. For example, if the correction in wave 2 was quite strong, then in wave 4 it will be insignificant and vice versa. Using this recommendation, you can approximately calculate the time of correction in the fourth wave. If, for example, in the second wave there was a significant and rapid correction, then in the fourth it will be calmer.
Another interesting fact. The completion of the correctional wave ABC should take place at the level of wave 4 (the minimum value).

Elliott wave theory in practice begins with plotting a graph. To solve this problem, it is better to use indicators; we will talk about some of them below. Experts recommend using a standard candlestick chart for analysis, as it is the most informative and objective. Elliott waves on the chart:

The first step is to identify a significant turning point. To do this, you can use a tool such as a signal line. From the moment it crosses, the period that we will consider begins.
Once the reversal point has been determined, we should assign names to all the waves of interest to us. This is a rather complex process, the correct execution of which directly affects the quality of subsequent analysis. It is important to remember that the assigned structural designation cannot subsequently be revised unless there are compelling reasons for doing so. The choice of time scale is up to the trader, but it is recommended to use segments no longer than thirty monowaves. Next, movement marks are placed.
At the final stage, the wave is compressed, that is, it is assigned the appropriate structural designation in a similar system on a larger scale. Thus, gradually the entire chart will be assembled into one of the basic Elliott models.

Now the trader sees the construction of the market and can predict how it will develop further.

Elliott waves in practice

The most common reason for trading the Elliott system is the presence of an impulse wave from a trend reversal point. Positions must be opened in one of the three driving subwaves, but you should be careful, as there is always a possibility that the chosen structure will be part of a larger corrective pattern. After the formation of an impulse wave, you must wait for the first correction. Its completion is a signal to enter the market.

Conservative method

After the movement towards the initial impulse has resumed, a signal line is drawn through the reversal point and the point of expected completion of the correction. A buy position is opened at the high of the first driving wave. If the price movement does not reach the order and reverses, breaking through the signal line (this happens in the case of a complex correction), you need to make sure that it does not fall below the reversal point. When growth resumes, the line is adjusted to the new low.

If the position was opened immediately, you need to continue to monitor the signal line. As soon as the price drops and touches it, the deal is closed and a new order is placed at the level of the extreme maximum. You should not be upset if, after touching the “signal”, the price curve immediately goes back in the direction of the trend. This is a working moment that should be taken philosophically; moreover, the resulting loss can still be compensated by a new contract.

Moderate and aggressive methods

The initial conditions for opening a position with a moderate strategy are similar to conservative trading. The difference is that the order is placed at the end point of corrective wave B. You must always remember that the expected correction may be delayed. Adjusting the signal line and exiting a position is carried out according to the same principle as in the previous method. This option is recommended for novice traders.

With an aggressive strategy, an order is placed only after the signal line is broken. It is believed that the very fact of such intersection indicates the completion of the structure and the beginning of the formation of a new model.

Indicators for Elliott Waves

There is no ideal indicator for plotting Elliott waves, but a variety of modifications allows each trader to find the option that best suits his style. Let's look at a few popular tools.

Elliott Wave Oscillator

This is an indicator whose chart displays a histogram (similar to). The highest peaks correspond to the third driving wave of the impulse. Can be used on almost any timeframe, however, too short intervals are not recommended.

When the histogram crosses the zero mark from below/from above, a divergence is formed, signaling the completion of the next wave cycle. If at the time of the first corrective movement the oscillator breaks through zero in the opposite direction, the formation of wave 3 should be supported by another divergence. If it is absent, we can assume that the starting point of the model is determined incorrectly.

A drop in the histogram by 30-50% relative to the local extremum indicates the end of the third wave and the beginning of the formation of the second correctional segment. Divergence also indicates the completion of the formation of the fifth wave - the rise/fall of the price chart is accompanied by a decrease/increase in the bars.

According to the first trading rule, first you need to wait for confirmation of the final crossing of the zero level. If the trend is upward, the indicator histogram is displayed above the middle level, if downward, it is displayed below the middle level. The position is entered after the first divergence. A rising price and a falling oscillator indicate a sale, and a reverse divergence indicates a purchase. You can enter after the corrective movement has gone down/rise by about a third relative to the first impulse wave. Stop loss is usually placed at the extreme level and the trade is closed immediately after the formation of a new divergence.

Elliott Wave Prophet and Watl

The Wave Prophet indicator is quite popular among traders who use Elliott waves. With its help, you can not only see completed movements, but also predict the future direction of the price. The wave model on the chart is built automatically. If a trader believes that the initial conditions were determined by the system incorrectly, he can always set them himself.

Watl is a convenient indicator that not only visually displays wave patterns, but also draws trend lines. The user can see trends of different time frames and forecast the future trend. As mentioned earlier, the optimal indicator for implementing Elliott’s theory has not yet been invented. The listed tools can be considered the most effective at the moment, but they are still far from perfect. However, this in no way detracts from their advantages and benefits for traders.

Criticism of Elliott Wave Analysis

Elliott waves are often criticized. Many opponents of this method believe that there is little practical benefit from it, since it is quite subjective. Moreover, there are opinions from actually practicing traders that this type of market forecasting is more likely to cause losses than profits.

What exactly do critics of wave analysis pay attention to?

First of all, they note that price movements cannot be predicted using such a framework. The price may deviate significantly from the waves drawn. In addition, there is a subjective factor here. After all, waves, like other types of graphic patterns, can be seen in literally any formation, if desired.

Some critics note that wave analysis is a method with a lot of nuances that are not clear to most traders. For example, it is not always possible to determine in the trading process where the waves begin and where they end.

Critics also point out that the best Elliott waves can only be identified on historical charts. As for working with this theory in practice, it is almost impossible due to a large number of factors.

Video about moving and corrective Elliott waves

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The main idea of wave analysis of the Forex market is that the price movement in any market is characterized by a wave-like nature, which makes it possible to predict the development of the situation in the future. Forex wave analysis from the world's leading brokers, provided to the client, helps to calculate preliminary variations in the continuation of price movement, the minimum and approximate potential of the available options, and knowing the signs of their confirmation - use any of them to make a profit, clearly understanding which wave is taken to make a profit, and lead that particular wave until the close of your trading operation. There are two types of waves: impulse and corrective, since the price movement is divided into two wave groups:

Impulses- waves that move the price either up or down (marked with numbers)
Corrections- waves that serve for an “adequate” reaction to an impulse (marked with letters)

Identification of a wave when plotting it on a price chart

Wave analysis of the Forex market identifies several ways to determine a wave when plotting it on a chart: at the closing price, at the maximum price, at the minimum, or by its average value. For novice traders who have just started using wave analysis of the Forex market, the optimal way to plot prices on a chart is to connect the maximum price with the minimum, and vice versa, the minimum with the maximum. In this case, the wave designation becomes visible, in addition to everything, the trader quickly masters charting skills.

To reduce the risk of losses during Forex wave analysis and to correctly calculate the stop loss size, Special attention should be given to the wavelength. Forex market wave analysis experts confirm that the longer the impulse waves, the longer, respectively, the corrective ones.

By using wave analysis in the market, a trader can most accurately predict price behavior on a particular time period. This type of Forex market analysis can become one of the most important indicators of success and an effective tool for a professional trader.

How to use wave analysis?

According to the Elliott wave theory, the price movement of any currency pair can be displayed on a chart in the form of waves. The waves are divided into three impulse waves, which are directed towards the main trend, and two corrective waves, which are directed against the trend. These waves are designated by the numbers 1, 2, 3, 4, 5. When the trend ends its active development, a correction of the price movement begins, displayed on the chart in three waves. Two of them are driving and one is correctional. These waves are designated A, B and C.

The essence of wave analysis is that price movement is natural, and the same pattern of price “path” is constantly repeated. Using wave analysis in the Forex market, it is possible to calculate the price behavior at a particular stage of the trend and, taking one of the waves as a profit, close the deal in time, making a profit. In order to reduce the risk of losses in the Forex market and correctly set the stop loss value, you should pay attention to the length of the waves. As a rule, the longer the impulse waves, the longer the corrective waves will be.

The main difficulty in using Elliott wave analysis is correct definition wave type. In order to correctly predict price movement, it is necessary to accurately identify which waves are impulse and which are corrective. As a rule, corrective waves are the most difficult to determine. Elliott Wave Theory is applicable to any tradable financial asset - from stocks and bonds to the EUR/USD currency pair.

Wave analysis of the Forex market is the prerogative of confident and knowledgeable currency exchange traders.

Unfortunately, more and more novice traders use other people’s mistakes and do not want to do them themselves, relying on private traders who maintain their blogs on the Internet.

When trading on the foreign exchange market, it is very important for every trader to be able to correctly identify market fluctuations. This is a sign of a successful and experienced trader. To do this, you can use wave analysis of the Forex market.

The history of the Elliott wave theory

Elliott wave theory was developed by Ralph Nelson Elliott in the 1920s. He discovered that market behavior previously thought to be chaotic was actually cyclical.

He also determined that such market cycles were the result of trader reactions to external events, which can also be called crowd psychology. Elliott noticed that the ups and downs of crowd behavior always resulted in the same repeating patterns, which he later called “waves.”

Market forecasts with wave analysis

Elliott made detailed market forecasts based on the unique characteristics he discovered in wave patterns. An impulsive wave that moves in the same direction as the dominant trend always shows five waves in the pattern.

On a more detailed chart, within each impulsive wave you can find five component waves. These waves are considered different stages in the Elliott Wave Principle.

In the Forex market, as in other financial markets, traders know that “every action becomes a source of positive and negative reaction,” just as a price fluctuation up or down must be followed by an opposite fluctuation. Price fluctuations are divided into trends and corrections or sideways fluctuations. Trends reflect the main directions of price movements, while adjustments fluctuate against the trend. Elliott called these impulse and corrective waves.

Forex Wave Analysis Theory Patterns

The theory of wave analysis of the Forex market is interpreted as follows on five patterns:

Every hesitation has its consequences.
Five waves move in the direction of the dominant trend, which is also followed by three corrective waves.
The movement of these waves is called a 5-3 wave and completes the cycle.
Each previous 5-3 wave oscillation becomes a component of the next higher 5-3 wave oscillation.
The basic 5-3 wave pattern remains stable, although the time span of each pattern may change.

In order for a trader to use wave analysis of the Forex market in everyday trading, he needs to learn how to identify the main wave and then buy a long position, which he will later sell, or take a short position when the pattern ends and its restart is inevitable.

The mathematical basis for using wave analysis of the Forex market is provided by Fibonacci numbers. They play an important role in the design and creation of the complete market cycle, which is described using Elliott waves. Each cycle that Elliott identified consists of ranges in which the waves move, and the ranges are determined by the Fibonacci sequence of numbers.