Elliott Waves Buoy Up your Online Trading

When Ralph Nelson Elliott looked through hundreds of stock charts back in the 1930s, the evidence suggested to him that price movements were not correlated with external news events. A particular kind of news item could spur a leap in prices on one occasion but precede a price slip on the next. Were the thousands of zigzags on Elliott’s charts, then, completely random?

His conclusion was that they were most certainly not random. There was, in fact, a force in the world with which they displayed a very strong correlation indeed: the human psyche. Robert Prechter of Elliott Wave International explains which aspect of the psyche Elliott had in mind: “The path [people] follow in moving from extreme pessimism to extreme optimism and back again tends to be the same over and over, regardless of news and extraneous events”.

The Elliott Wave Principle states that asset prices do not reflect traders’ passive reactions to historical events but, rather, their emotional metamorphoses that continue irrespective of outside stimuli. These metamorphoses develop in sets of waves that are, in fact, proportioned similarly to other natural phenomena like pinecone whirls and galaxies. The “Golden Ratio” exhibited in the Fibonacci number sequence describes that universal proportionality. This incredible theory ended up outliving most of the price pattern theories that have been proposed and discarded since then. Not only does it still boast many loyal adherents, but its predictive power continues to raise eyebrows. In this article, the team at iFOREX will start opening the door to using Elliott waves in elevating your CFD trading in stocks, forex, or commodities to the next level.  

You are Here

There’s a famous film about a man who escapes from an island prison. He tries to time his jump into the ocean perfectly so as to be whisked away by the strongest wave in the sequence. Indeed, it’s true that some waves in a sequence are stronger than others, and that their appearances describe a pattern. The tricky part – as the escapee discovered – lies in figuring out where you are, presently, within that sequence.

This is the main reason that Elliott waves don’t give you precise points at which to open and close your deals. Traders will have different interpretations of where a wave starts and where it ends. This doesn’t mean anyone’s interpretation is just as good as anyone else’s. It means that, the more time and energy you put into learning about Elliott waves, the better you’ll become at recognizing them and the more of an advantage you’ll have over other traders. In addition, Mr. Elliott does offer assistance in marking out the most relevant waves in a sequence. But what does Elliott Wave Theory actually say?

The Human Phenomenon

Human beings crowding around oil, forex, or crypto prices in an online trading situation will alternate between enthusiasm and despair in a very specific way. There will be an optimistic push upwards followed by a pullback; then this dynamic will repeat itself; and then there’ll be a single surge upward to end off with. In summary: there will be a five-movement sequence which takes prices above where they were beforehand, made up of three upward thrusts and two corrective hiccups. The name for this entire sequence is an impulse wave.

Following this five-part upward-moving wave comes a three-part correction: Prices go down, then up, and then down again. Two waves of the correction, then, proceed in its overall (downwards) direction, while one of them will re-assert the original upwards trend. After both the impulse and the correction are finished, we see that enthusiasm has, with difficulty, taken the cake from despair. But here comes the mind blast: Looking at the impulse wave on a broader scale, we see that all five parts of it form only the first section of a much larger impulse wave. And the three-wave correction is only the first little pullback in that grander five-part movement upwards!

Using Elliott Waves

How does it help you to know all this? If you correctly recognized an impulse wave and where you were presently holding within it, you could elect to keep your buy position open until the completion of that wave, and then close it on your anticipation that a three-part correction wave was on its way.

Traders know, however, that Elliott waves don’t offer them a neat series of buy or sell signals for their asset. What they do offer is an enhanced understanding of the general trends guiding prices, on the condition you use them correctly. When you really do become an expert in using them, great things are possible. Elliott, himself, managed to accurately call the bottom of the sinking Dow Jones Industrial Average index in March 1935, leaving many of his contemporaries in open-mouthed awe.

The Waves Keep on Coming

One of Elliott’s most important realizations was that impulse waves alternate with correction waves in proportions determined by the Golden Ratio, for instance 38% and 62%. After the publication of his work, people began to view the cycles of trader enthusiasm and pessimism as illustrations of the universal principles guiding nature. And this, really, is what you’ll be studying if you choose to extend your Elliott Wave studies: The key tendencies of human beings’ minds when they’re put in an online trading environment.

A great place to continue your study and application of Elliott Wave Theory is on the trusted iFOREX CFD trading platform. iFOREX clients use the app’s extensive education centre to constantly improve their grasp of technical analysis tools like Elliott Wave Theory, but also to polish up their understanding of more basic trading concepts. Visit the iFOREX website to find out more.