Hello guys today we're going to talk about the Elliot Wave theory of price movement.
The Elliot wave theory was introduced by Ralph Nelson Elliot in the 1920s
The Elliot wave theory has withstood the test of time
because as you may know, traders still use it
a hundred years after it was introduced. Elliot believed that the market moves
in repetitive cycles
and he named those cycles as waves. I'm going to help you
understand how Elliot waves looks by by showing them to you using some slides I have prepared
prepared from cTrader
so let's go and see those slides. In the first slide here we see
a normal price action price action of EURUSD
h1. What we're looking on this EURUSD 1h chart is actually a bearish Elliot Wave
Let's talk about, let me go through
the Elliot Wave theory and you will understand what's happening. So let's move to the
next slide.
The first wave is called
an impulse wave. It's Impossible to know if the first wave was
indeed wave
number one, or it's a retracement of the previous trend. So
In this wave the previous trend is still in force and the market is going short, but
the original trend is
is still in effect. The next wave, wave 2 on the second slide, is called a correction
wave. Elliot waves are always either impulse waves or correction waves. It can never extend
below the starting point of the first wave, it's actually a retracement of the first wave,
and it most usually does not retrace more than 61.8% of the first wave, so we can use
the Fibonacci retracement tool here to measure the retracement of the wave 1. Now let's move
to wave 3. Wave 3 is usually the largest wave of all, usually not always, and it's the one
that clearly shows that the original bullish trend does not prevail any more as you see
on this graph, up until wave number 2, one could argue that the up trend is still in
effect, but at the end of wave 3, no there is no up trend any more. The corrective wave
4 usually retraces less than 38.2% of wave 3. So if we enter here short, we can place
our stop loss somewhere around here. Now let's talk about wave 5, wave 5 is the last leg
in the direction of the now dominant short trend, at the end of this wave momentum indicators
start showing divergences and we have the full effect of the now prevailing down trend.
After the first 5 legs of the dominant trend, the corrective trend begins. Wave a is considered
only a correction of the now dominant trend, and it usually goes up to the beginning of
wave 5, it depends. Next comes wave b, in wave b - these waves a and b are not numbers
any more because Elliot wants to show that the direction has changed- so 1-2-3-4-5 are
for the same direction, long or short and a/b/c waves are on the opposite direction.
In wave b prices reverse lower but usually not lower than 50% of leg a and a head and
shoulders formation starts forming. There is another entry here, in retracement point
of leg a or you can enter when a bottom is formed on leg b based on candlesticks formations.
We see here on leg b a retracement of leg a. The last wave wave c is typically the same
size as wave a, that's why you can put your take profit after measuring the length of
wave a, and the fibonacci expansion tool is specifically used for this reason, it measures
the wave a and gives you a target for wave c. So now that you know how an Elliot wave
looks like, let's go to cTrader and I am going to show you a bullish Elliot wave, I am going
to quickly draw it so you understand how a bullish Elliot wave looks so we have here
a chart of AUDJPYof 1 hour and I have previously drawn the points of the Elliot wave. So we
have previously a down trend, now we have a new retracement of that trend and we have
leg 1. After the retracement of leg 1 as we have said before there is wave 2. Then we
have wave 3, which goes beyond the high of wave 1, then we have a retracement of wave
3 at wave 4. Then again we have the biggest wave, wave 5 which is the top of this new
prevailing up trend, it doesn't go higher. Then we have a big retracement of wave 5,
and we come to wave a, then we have a retracement of wave a to b, then a head and shoulders
has clearly formed now, then we have wave c, if we measure the waves, you'll see that
wave a is 97 pips, and wave c is 115 pips, so wave a is practically almost always the
same as wave c. Now that I have demonstrated a bullish and a bearish Elliot wave, let's
talk about some principles of the Elliot waves, so that you can understand better how you're
supposed to trade them and how they work. The first important principle of Elliot waves
is that, Elliot waves are very rarely perfect. I have shown you waves that are close to perfect
so you can understand easier how an Elliot wave is supposed to look, but in reality Elliot
waves are really open to interpretation by traders, they are sometimes a bit subjective,
and they are rarely completely perfect. The second principle of Elliot waves is that Elliot
waves are fractal in nature. What does "Fractal" means? Fractal means that if we identify an
elliot wave in the one hour time frame for example, if we take wave 1 of that Elliot
wave, and we zoom in or change time frame to one minute time frame or 5 minutes time
frame, we're going to see that, this wave, also is made out of Elliot waves, and if we
zoom more into the price and go to the tick charts, we're going to find Elliot waves making
every wave of the M5 chart. That's what fractal means it means that you can zoom more and
more and more and you're still going to be finding Elliot Waves that make other waves.
Kind of hard maybe to understand, so let's go to cTrader I am going to help you understand
by giving you an example. So for that example we'll use the 30 minute chart of USDJPY. We
see here a bearish Elliot wave, we have wave 1, we have wave 2, wave 3, wave 4, wave 5,
a, b and c. C is still in development. Someone could say that c has finished here, still
going up. What I want to show you however is, I want you to concentrate on this area.
We see here wave 4 to 5 and 5 to a. Now what I am going to do is I will go to the 2 minute
timeframe of the same currency pair USDJPY and we're going to zoom in into this area
here. So let's go and as we can see we can see that we have again, this is the big wave
4 so let me mark it for you. You see this 4 here? let me move it a bit, the 4 here is,
this 4 is the end of this wave, so this is where wave 4 ends. What we're going to see,
we're going to see that this is the wave 5 of the big time frame, but we're going to
see that it's also made out of Elliot waves. We have again wave 1 on the retracement, wave
2, 3, 4, 5 again a, b and c. That's what fractal means. It means that we have an Elliot wave
in M30 time frame and if we zoom into the price here, we're going to see that each wave
of the bigger wave is also made out of Elliot Waves. The next principle of Elliot waves
is that very often the last wave, wave c is also wave 1 of an Elliot wave that goes on
the other direction. So for example if we have a bullish Elliot wave, and wave c is
bearish, then wave c can be also wave 1 of another Elliot wave. Sounds kind of confusing,
let's go to cTrader where I am going to show you what I mean. We are again on the presentation,
so I have a slide here, we have a bullish Elliot wave 1, 2, 3, 4, 5, a, b and then we
have wave c of the Elliot wave. This wave c of the bullish Elliot wave is also wave
1 of a bearish Elliot wave. So it starts, wave c and 1, 2, 3, 4, 5 again a, b, c. So
this is what I meant. Elliot waves are often connected together. So now that we have talked
about the principles of Elliot waves, I want to show you how to use Elliot waves in your
trading, we're going to trade the Elliot wave that we found on m2 of USDJPY. So let's go
back to cTrader I am going to show you what tools you should be using and how you should
be thinking, so we see here USDJPY, m2. We start looking at the price after the first
big retracement of the trend, or a big directional movement. In this case here we have wave 1,
there was a previous up trend, or another Elliot Wave finishing, we have wave one here.
The first wave is always considered a retraecement, and we cannot just trade it like an Elliot
wave, unless the first wave is also wave c of another Elliot wave, like I showed you
before. In this case it doesn't happen so let's just continue. If it seems that wave
c is also wave 1, then we can enter the retracement of wave 1, using a Fibonacci retracement tool,
so we can draw here a Fibonacci retracement and we can enter on 50% level, so let's mark
50% level, it's not marked here, let's change it, we can enter around 50% and it's a good
entry for that or, depending on your personal choice maybe another retracement level. Alternatively,
you cannot use Fibonacci retracement, you can use moving average cross overs on the
retracement or Japanese formation to find a retracement or whatever. This way we can
get the Elliot wave 3 so let me show you again, let's assume that we have drawn a Fibonacci
retracement and we enter at 50% retracement of wave 1 so here we're going to get wave
3. You can exit any way you think, you can use the same tool to get an expansion of wave
one or whatever or another exit method. Next we can trade also the retracement of wave
3 using the same technique Fibonacci retracement for example, so we can again enter on the
50% level of wave 3, you see it goes exactly there in this case we're very lucky, and you
need to remember that for wave 4 to 5 you need to have a big target, because wave 5
is usually the biggest one. After wave 5 we do not trade the A wave we wait for the retracement
to happen naturally, what you do is trade the retracement of the A wave to get the c
wave. For that we usually use the Fibonacci expansion tool and what we do is we measure
wave 5 to a, then we measure wave b, you see here? 5 to a, a to b and the Fibonacci expansion
tool is going to give us a target which is 100%, what this target says is it's actually
giving us the same number of pips from 5 to a (13 pips) as a target. So again 13 pips.
Because like we said before usually in most cases wave c is exactly the same length as
wave 5 to. b to c is the same as 5 to a. So we're going to hit our target here it goes
exactly almost exactly at 100%, it continues going higher. In this video we talked about
the Elliot wave theory, and I have shown you how an Elliot wave is made, I've shown you
the principles of Elliot waves I explained the fractal nature of Elliot waves, and I
also shown you how you should be trading and what tools you should be using, so you should
not have any questions by now. Just remember that Elliot Waves are a bit subjective they
are opened to interpretation by traders, so you need to be extra cautious sometimes. If
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Thanks for watching.