TRADING WITH ELLIOTT WAVES EXPLAINED FOR DUMMIES

Created by Ralph Elliott in the 1940’s the Elliott Waves Theory remains a unique approach to trading. It is the only trading theory that considers human nature and the impact of market psychology on the way the prices move. The funny thing is that it was developed on the stock market. At one time, Elliott fell ill.

As such, he had a lot of time to study the prices and came up with a set of rules that guide the way a market moves. Because any market moves because of the forces that impact it (buyers and sellers), Elliott rules can be applied to any financial product.

To this day, there’s virtually no trader that didn’t hear about the Elliott Waves Theory. However, few traders grasp its importance and its predictability power.

Elliott Wave Cycles

Elliott found that any market moves in cycles. And, a cycle has both a motive wave (impulsive wave) and a corrective one (a correction). 

While everyone knows the basics of impulsive and corrective waves, the Elliott Wave Theory is not a simple concept. It may look like being simple, but it isn’t. Its complexity comes from the different cycles the market forms. 

They are of various degrees, and every cycle has an impulsive and a corrective component. This is what makes the theory so complicated. It’s simplicity!

Defining an Elliott Cycle

The starting point of any Elliott analysis is understanding how different cycles unfold. As such, it all starts with a cycles definition. As a rule of thumb, a bullish Elliott cycle has five waves up, corrected with three waves down. Or, a bearish one, has five waves down, corrected with three waves up.

Elliott called the five-wave structure, an impulsive move. And, the three-wave one, a corrective structure. As such, an Elliott Wave cycle has an impulsive and a corrective structure. Depending on where the cycles form, they are of various degrees.

Nowadays, it is easier for traders to spot them. We have personal computers and access to trading platforms that present the financial data in time frames. Therefore, on the monthly time frame there’s the bigger degree cycle, and so on. The lower the time frame becomes, the smaller the cycle is. 

However, the structure stays the same. Moreover, Elliott laid a set of rules for both impulsive and corrective waves.

A Logical Process

Trading with the Elliott Waves Theory is a logical process. Or, to be more exact, the analysis is part of a logical process. The first question a trader must ask is if the move is impulsive or corrective. There are clear rules to distinguish between the two.

Let’s assume a trader thinks the move the market makes is impulsive. Next, he/she checks the rules of the impulsive waves. If only one of the numerous rules that make an impulsive wave, is not respected, the move isn’t impulsive. However, we talk about a logical process here. 

If the move is not impulsive, the only other possibility is for it to be corrective. Traders don’t need to check anymore for the rules of a corrective wave. Because the move wasn’t impulsive, it MUST be corrective. There’s no other alternative to it.

And, so on. The next thing to check is what kind of a corrective wave, then the type of it, etc., until the pattern recognition approach leads to the right interpretation. All these are discussed in the video presented here. The idea is to fully understand how waves unfold and what the Elliott Waves Theory stands for.

Later in the parts to follow, we’ll cover even how to trade binary options just respecting a few rules, as they were laid down by Elliott. But what makes an impulsive and a corrective wave? Find out the rules of an impulsive wave in the second part of this project dedicated to the Elliott Waves Theory.