Elliot Waves Strategy

Elliot waves were first described by Ralph Nelson Elliot in his book “The Wave Principle” published in 1938. With his Wave Principle, Elliot was modelling the behaviour of people when they gathered in mobs. It is a complex study, but simply put, the theory explains how the mob mentality works and how the sentiment of a crowd functions in measureable and predictable patterns.

Early stock traders immediately realised that these models could be applied to the behaviour of the financial markets and the way prices move and change direction. Elliot Waves have been an important part of technical analysis and shed light on some of the more perplexing areas of analysis.

Learning about Elliot Waves and how to work with them and apply them requires a lot of time and dedication – they are almost a separate but essential discipline that all traders should aspire to embrace.

What Exactly Are Elliot Waves?

Applied to the financial markets, Elliot’s theory allows the major movements of the markets to be expressed as waves which are measureable, repeatable and predictable. The value of this particular tool is that it has a predictive element where most other indicators and tools lag the market and so describe what has already happened, not what is coming up.

According to Elliot Waves, each wave has unique characteristics which can be described. This look into the future is incredibly valuable to traders.

Elliot identified two types of wave, Impulse and Corrective. These are then divided into fractals, or smaller waves. Each Impulse wave is followed by a Corrective wave.

Going back to the fractals, within each Impulse wave there are 5 sub-waves. As an example, in a bull market, each upward Impulse wave contains three up cycles interspersed by two down cycles. Corrective waves contain three sub-waves – 2 down cycles separated by one down cycle.

Traders benefit from this because as each wave comes in, the wave to follow can be predicted and trade targets can be anticipated.

The Elliot Wave analysis is closely related to Fibonacci Retracements which were also the work of Ralph Elliot. For a Fibonacci Retracement to function properly, it must start with an Elliot Wave.

AS with all fractal structures, Elliot Waves repeat their pattern over and over as they get smaller and smaller. Let’s look at the bullish Impulse wave with its three up and two down impulses. Each one of those five sub-waves contain five of their own sub-waves, and so it goes, smaller and smaller.

Of course for the binary options trader, this means that Elliot Waves can be used across all time frames. The Waves will reveal what the markets are most likely to do in the next wave and whether that wave will be Impulse or Corrective.

As with Fibonacci Retracements and other tools that traders use, they cannot guarantee that the market will move in a specific way. They can only give one an idea of the possibilities and likely projections.

Why Elliot Waves Might Suck

Elliot Waves are based on complex theory and getting your head round even the basics will take time and focus. They also provide a basis for conjecture as opposed to rock solid prediction, so any results you come up with will be subjective. However, once you fully understand the theory you will be able to include it in your strategies with some gratifying and profitable results.

Why Elliot Waves Do Not Suck

There is nothing wrong with Elliot Waves. It is a highly sophisticated tool based on market behaviour. Once you have cracked the discipline of using it, you will be able to develop accurate targets and entry points. For a tool that you will use across all your trading on a daily basis, mastering Elliot Wave is well worth the hard work.

My Last Thoughts on Elliot Waves

Elliot Waves are an entire thought discipline that will pervade all your trading analysis and strategies once you have mastered the principles. The use of Elliot Waves will make you a more disciplined, successful and profitable trader and is something that will put you on to the next level.

New traders should get into it as soon as possible and established traders should embrace the theory and discipline that Eliot Waves offer as it will make them far better traders.