The Role of The Elliot Wave Theory in Forex Trading

By: John Pinion

The foreign exchange market or commonly referred to as the Forex market, is the largest financial market in the world. The trading volume far exceeds the trading volume of many stock exchanges combined. The Forex market is traded OTC or “Over-the-counter”. In FX trading, currencies are usually traded in pairs. Trading in the Forex market yields good profits and the market is known for its liquidity. The chances of earning profits are usually high. This is because if the value of one currency drops, the other is bound to increase.

Earnings from the Forex market have saved many households during the recession and it has served as a passive source of income for many households in the United States. However, in order to earn profits, you need to have a clear understanding of how the Forex market works. If you can predict the movement of the market, there is nothing that can stop you from mastering the art of predicting changes.

The Elliot Wave theory plays an important role in determining the movement of the market and its trends. The theory was developed by Ralph Nelson Elliot during the 1920s for predicting movement as well as trends in the FX market. This theory applies the principle of fractal mathematics in determining the FX market movement.

According to the Elliot Wave theory, the Forex market moves in series that consist of 5 upward swings and 3 swings back down. This is usually repeated without interruption. It appears to be simple but the main factor that decides the fate of a Forex trader is the timing. There is no particular time for an upward or a downward swing to take place. This makes it very tricky.

According to fractal mathematics, there are several waves within a wave and so forth. It is important that the crests and the curves are interpreted in an appropriate manner.

The Elliot Wave Theory at a Glance

The standard law that is applied to study the behavior of a crowd is the same as the law that is applied in physics, which says “Every action has equal and opposite reaction”. In the case of the Elliot Wave theory, it is “Every action is followed by a reaction”.

• There are basically 5 swings upward that move in one direction. This is usually followed by 3 “corrective waves” that move back (to the starting point).

• The 5-3 series of movement is one complete cycle. However, there is more to it. The waves are in turn made up of several other waves and those are again made up of many other waves.

• Although the pattern of the 5-3 series remains constant, what differs is the time. It is difficult to predict the time when the 5 upward as well as 3 back swings will take place.

• You are a successful trader if you are able to find out the starting point of the wave and anticipate the time when the 5-3 complete series will take place.

The importance of observing and studying the wave pattern is important as it will help you to take the correct decision when you are trading currencies in the Forex market. By studying the direction of the waves, you can predict the movement of the market. This can help you in making important decisions about your investment.