Docstoc

The Elliott Wave Theory For Forex Markets

Document Sample
The Elliott Wave Theory For Forex Markets Powered By Docstoc
					The Elliott Wave Theory For Forex Markets


First what is Forex: The FOREX or Foreign Exchange market is the largest
financial market in the world, with an volume of more than $1.5 trillion
daily, dealing in currencies. Unlike other financial markets, the Forex
market has no physical location, no central exchange. It operates through
an electronic network of banks, corporations and individuals trading one
currency for another.

The Forex, or foreign currency exchange, is all about money. Money from
all over the world is bought, sold and traded. On the Forex, anyone can
buy and sell currency and with possibly come out ahead in the end. When
dealing with the foreign currency exchange, it is possible to buy the
currency of one country, sell it and make a profit. For example, a broker
might buy a Japanese yen when the yen to dollar ratio increases, then
sell the yens and buy back American dollars for a profit.
One of the best known and least understood theories of technical analysis
in forex trading is the Elliot Wave Theory. Developed in the 1920s by
Ralph Nelson Elliot as a method of predicting trends in the stock market,
the Elliot Wave theory applies fractal mathematics to movements in the
market to make predictions based on crowd behavior. In its essence, the
Elliot Wave theory states that the market - in this case, the forex
market - moves in a series of 5 swings upward and 3 swings back down,
repeated perpetually. But if it were that simple, everyone would be
making a killing by catching the wave and riding it until just before it
crashes on the shore. Obviously, there's a lot more to it.

One of the things that makes riding the Elliot Wave so tricky is timing -
of all the major wave theories, it's the only one that doesn't put a time
limit on the reactions and rebounds of the market. A single In fact, the
theories of fractal mathematics makes it clear that there are multiple
waves within waves within waves. Interpreting the data and finding the
right curves and crests is a tricky process, which gives rise to the
contention that you can put 20 experts on the Elliot Wave theory in one
room and they will never reach an agreement on which way a stock - or in
this case, a currency - is headed.

Elliot Wave Basics

Every action is followed by a reaction.

It's a standard rule of physics that applies to the crowd behavior on
which the Elliot Wave theory is based. If prices drop, people will buy.
When people buy, the demand increases and supply decreases driving prices
back up. Nearly every system that uses trend analysis to predict the
movements of the currency market is based on determining when those
actions will cause reactions that make a trade profitable.

There are five waves in the direction of the main trend followed by three
corrective waves (a "5-3" move).

The Elliot Wave theory is that market activity can be predicted as a
series of five waves that move in one direction (the trend) followed by
three 'corrective' waves that move the market back toward its starting
point.

A 5-3 move completes a cycle.
And here's where the theory begins to get truly complex. Like the mirror
reflecting a mirror that reflects a mirror that reflects a mirror, the
each 5-3 wave is not only complete in itself, it is a superset of a
smaller series of waves, and a subset of a larger set of 5-3 waves - the
next principle.

This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.

In Elliot Wave notation, the 5 waves that fit the trend are labeled 1, 2,
3, 4 and 5 (impulses). The three correcting waves are called a, b and c
(corrections). Each of these waves is made up of a 5-3 series of waves,
and each of those is made up of a 5-3 series of waves. The 5-3 cycle that
you're studying is an impulse and correction in the next ascending 5-3
series.

The underlying 5-3 pattern remains constant, though the time span of each
may vary.

A 5-3 wave may take decades to complete - or it may be over in minutes.
Traders who are successful in using the Elliot Wavy theory to trade in
the currency market say that the trick is timing trades to coincide with
the beginning and end of impulse 3 to minimize your risk and maximize
your profit.

Because the timing of each sequence of waves varies so much, using the
Elliot Wave theory is very much a matter of interpretation. Identifying
the best time to enter and leave a trade is dependent on being able to
see and follow the pattern of larger and smaller waves, and to know when
to trade and when to get out based on the patterns you identify.

The key is in interpreting the pattern correctly - in finding the right
starting point. Once you learn to see the wave patterns and identify them
correctly, say those who are experts, you'll see how they apply in every
facet of forex trading, and will be able to use those patterns to trigger
your decisions whether you're day trading or in it for the long haul.

				
DOCUMENT INFO
Tags:
Stats:
views:11
posted:8/3/2012
language:English
pages:2