hello and welcome to the ditto educational series that will provide you
with the skills you need to become a forex trader on today's episode we will
be discussing an introducing Elliot wave theory Elliot wave theory was developed
by Ralph Nelson Elliot in the 1930s Elliot believed that markets generally
did not behave randomly and in fact traded in repetitive patterns let's now
take a look into Elliot wave theory and how it is applied to the forex market
Elliot theorized the trends in financial prices resulted from market participant
psychology he found that swings in my psychology always relate themselves in
reoccurring fractal patterns or waves in the financial markets
Elliot's theories resemble another theory we'll talk about in future known
as the Dow Theory both theories recognized that prices move in waves
Elliott however additionally recognized that the market had a fractal nature
fractals which we have discussed previously on mathematical structures on
a small enough scale they infinitely repeat themselves
Elliott identified that price patterns were also structured the same way from
this he then tried to find a way that his repeating patterns could be used as
a leading or predictive indicator Elliott derived detailed stock market
predictions based upon the reliable characteristics he discovered in the
wave patterns in this example we have an impulse wait it travels in the same
direction as the larger trend and there are always five waves within the pattern
next we have a corrective way this travels in the opposite direction of the
main trend within the forex market where the price moves up or down it is always
followed by a correction or a opposite movement trends show the main direction
of prices while corrections move against the trend these examples are two waves
that represent both movements let's now take a closer look into the impulse and
correction waves the impulse wave has five waves moving in the direction of
the overall trend this is followed by three waves moving in a correction
against the trend this is two waves made up of five and three moves they then
become the two subdivisions of the next higher wave move look at the following
example made of the eight total waves we have discussed the impulse wave labeled
one to five and the correction wave labeled eight to see the five wave
impulse will enter and go on to form wave one at the next largest agree and
the three wave correction will go on to form wave two at the next largest agree
the properties of the corrective wave normally have three distinct price
movements two of the movements are usually in the direction of the
action these are counter-trend and one move will travel in the direction of the
trend similarly in waves two and four of the
impasse wave these are corrections against the trend so to summarize this
information so far waves are formed by the market movements they are defined by
their behavior the entirety of an impulse wave and the correction wave
together can form the beginning of a larger degree wave how do we know we are
seeing a wave in progress as always there are rules to the identification of
waves the impulse wave wave 1 wave 1 is not always apparent at first when the
first wave of a new bullish market begins fundamental and technical outlook
is usually entirely negative the previous trend has not given us enough
information to consider that it is about to reverse sentiment is usually still
bearish at this point and remember Elliott Wave is rooted in psychology
wave to wave 2 is the correction of wave 1 it can never extend beyond the
beginning of wave 1 or it becomes invalid prices retest previous slow
bearish sentiment can quickly increases people anticipate the downtrend may
continue however volume is generally lower than seen in wave 1 if we were to
measure the retracement it's very common that it doesn't go beyond the 61.8%
level when using a fibonacci retracement tool wave 3 wave 3 is usually the
largest movement in the wave in a trend and can generate the largest yield in
peps this can vary in different markets such as commodities where wave 5 is
sometimes the largest the fundamentals now are more positive and prices begin
to rise quickly smaller Corrections usually are short-lived and shallow an
opportunity to now get involved on a pullback is limited it is often at the
midpoint of wave 3 that the market participants begin to change the
sentiment and heavily get involved in the buy side
the bullish trend is now becoming certain wave 3 often extends beyond wave
1 by a ratio of one point six one eight to one webinar she shows its hand again
wave four wave four is the second corrective move prices may stall and
move sideways for an extended period wave four typically retrace is less than
thirty eight point two percent of wave 3 we see volume levels well below that of
wave three this can be a good opportunity to buy in the pull back when
expecting the potential rise for wave five wave five is the last phase in the
direction of the now dominant trend news is almost universally positive and
polish outlook is almost universal volume is often lower in wave five than
wave three and we begin to see divergence on momentum
indicators despite market participants still entering buys the move is now
complete and the correction wave is anticipated the correction wave a
Corrections are generally harder to identify than impulse moves in wave a of
a B market the fundamental news is still positive the behavior seen is similar to
that at the beginning of wave one we may see increased volume and possibly a turn
hire an open interest our video explaining open interest is a very good
lesson in regards to this wave B is the correction price is reverse higher some
participants will see this as a resumption of the bull market technical
analysts may see the peak as the right shoulder of the Head & Shoulders
reversal pattern fundamentals are probably getting worse at this point but
not entirely negative and volume during wave B should be lower than in wave a
wave see prices move steadily lower volume increases and the B market is now
confirmed wave C is typically at least as large as wave a and often extends to
1.618 times wave a or beyond Elliot wave theory is a complex and expansive
subject that we will look into continue teaching in future this introduction to
the theory is just the tip of the iceberg in terms of what there is to
know please contemplate what you have learned
here today and remember contemplation is the key to learning thank you for
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