If you are checking out the various opportunities while trading in the forex market, then your focus must be on predicting the continuations or changes that might arise in the prices. Most of the forex traders rely on technical processes to understand the trends in the forex market. Similar to the fundamental process, the technical process also has leading and lagging indicators. The most reliable tool that traders opt for predicting the market swings is the Elliot Wave analysis tool. You can use it to understand the market trends in a better way. It is also helpful in calculating a trend’s possible price target.
You can also apply this analysis to short as well as long trade swing setups. Ralph Nelsen Elliot first noticed the repetitive wave trend in the movement of the markets. According to him, this action depends on the characteristics of the markets. The conclusion that he derived was that the share market is fractal and the movements of the market are the direct effect of its various characteristics. Fractals always form in harmony with the Fibonacci ratios. Elliot considers the human tendency to group to be the main reason that controls the character or psychology of the market.
Hence, the market swings depend on the psychology of the investors and traders, who are trading in that market. This is the reason why the market is upbeat when the moods of the traders are upbeat and not the other way around as generally considered. The sequence that the Elliot Wave patterns follow is that the market moves down in a series of two waves and up in a series of three waves. The downward wave is the corrective sequence, whereas the upward wave is the impulse sequence and they form the base of the 5-wave pattern.
The first wave stands for short covering. It is normally the weakest among all the waves.
The second wave stands for a short-covering pullback. On the completion of wave 1, wave two is created.
Third-wave stands for the major phase. It is the strongest and longest wave among all the waves.
The fourth wave stands for the rally’s institution pause. It begins when the traders start taking practice and the currency pair starts retracing.
The fifth wave stands for retail buying. The traders support it and hence, lack the momentum of wave three.
Never use an indicator alone as a tool like all other technical tools. You will also require a confirming indicator and a trigger. There is a variety of software programs available in the market to help you with the counts of Elliot waves that have their own indicators for an entry signal. It would be better if you can trigger the pattern of a candle. You can draw a channel for regression and then look below or above the channel for a break. This is just an overview of how you can use Elliot Wave analysis to grow in forex trading.