Elliot Wave Theory is used by plenty of traders to try to spot trends in the market and take full advantage of them. You have likely heard of this theory even if you haven’t used it for yourself just yet.
Hopefully, you will want to dive right into Elliott Wave theory once you have a better understanding of what it is all about and how it can benefit you.
What you will be looking for on the charts are “wave counts”. You need to see these to confirm that an Elliott Wave formation is taking place and that you can dive in to take advantage of it. We will take you through some scenarios that you may see in real market conditions.
“Probably Correct” Scenario
You are starting your wave count and you notice that the price of the currency appears to have hit the floor and is now headed upward.
You call this climb wave 1. The retracement from that climb is called wave 2.
To figure out where you should perhaps place some of your money into a trade, you will need to use the cardinal rules of Elliott Wave Theory to figure it out.
For example:
- Wave 2 must always be shorter than Wave 1
- Waves 2 and 4 will often bounce off of Fibonacci retracement levels. If you notice on your chart that Wave 2 appears to be sitting on the same Fibonacci level, then it may be a very strong sign that now is the time to buy. The retracement may have come to an end, and it might be the right time to act to place a buy order.
In our scenario, the price is hanging around the 0.618 Fibonacci level. You can always stop to make sure your assumptions are correct. Allow the market to play out a little before you immediately dive in.
In our scenario, let’s see if the market went where we thought it might.
If you are using Elliott Wave Theory correctly to spot opportunities, then your assumptions probably are right, and you can profit nicely from this trade.
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Trading the a-b-c Corrective Waves
Corrective wave patterns happen too, and you can profit from them as well. Remember from previous lessons the a-b-c pattern of corrective waves?
You see that the currency pair is in an uptrend, and the a-b-c corrective waves are moving sideways. You see this as a sign of a market that is likely to continue the trend that it was on before. You jump in with a buy order on the C wave, and then you hold that order.
Bingo! You correctly predicted that the upward trend would continue, and you were right in your assumption. Thus, you were able to capitalize on the way that the currency moves, and you took the actions that you needed to take to score a winning trade on the upside.
Aren’t you glad you know Elliott Wave Theory?
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