The famous Elliot wave theory was developed by R.N. Elliott. This theory has changed the whole world of trading. Trend trading and identifying the reversal is very easy using the Elliot wave theory. The Elliot wave generally consists of 5 waves in the forex trending market. Out of the five waves there are three impulsive waves or motive wave and two corrective wave.
Let’s see an example of Elliot wave sequence
Figure: Elliot Wave sequence
1, 3, 5 are the impulsive wave or the motive waves formed in an uptrend. The correctives wave is 2 and 4.This simple wave theory helps the trader a lot while trading the trending
The first wave is the initial starting wave of any trending currency pair. The second wave is known as the corrective wave. The market retraces downward in second wave creating a higher low. In an uptrend formation higher low is very important since it tells us about the momentum of the trend. The third wave is the most extended wave in Elliot wave. This the trending wave of Elliot wave which creates the major move of the trend. After the major upward move the market tends to retrace a bit. Thefourth wave is the last corrective wave in an uptrend. The fifth wave is the last and final wave of an existing trend according to Elliot wave theory.
Trading the Elliot wave
Trading the Elliot wave is very simple. Trader usually rides the third wave of the Elliot wave. Generally a trend line is drawn from the Elliot wave for taking the trade setup. If there is no valid trend line setup traders can use the support and resistance level to take the trade. Price action confirmation should be present while taking the trade at starting of the wave 3.
There are a number of different ways that the professional trader uses to achieve the better result by trading the Elliot wave. They use price action confirmation signal once the major wave completes its formation in a relevant “key support and resistance level”. There are many traders who often consider that there might have extension in the Elliot wave theory. In reality, the market sometimes tends to exhibits the 6th and 7th extended wave in a trend. The exact cause of this phenomenon is still undefined yet many professional traders consider it the irrational behavior of the market. If the traders learn the basic concept of the Elliot wave theory by heart then their trading skills will develop to a great extent. They will know how to identify the trend reversal pattern and what is the “deep correction” of the market. To be precise by practicing the wave trading strategy, one can master the art of retracement entry and trend trading technique. There are many professional forex traders out there in the fibogroup.eu who are successfully trading the market only with the Elliot wave theory and price action confirmation signal. Though the system is very profitable yet it’s highly recommended not to risk more than “2% of trading capital” on any single trade.