How to Boost Success in Trading with Elliott Wave Theory

Learning to trade while adopting the best available strategy cannot be learned in a matter of days. This comes with years of experience in trading. Within the financial market, Elliot Wave Theory holds great importance. 

Elliot Wave Theory can analyze and interpret the market to a much higher degree due to its fractal nature. It means that this theory identifies the never-ending patterns repeated repeatedly, making itself similar on different scales.

While trading with Elliott Wave theory, a trader is required to look for five consecutive waves pattern before making a trading decision. The first step to understanding the Elliott Wave theory is by identifying two different types of waves:

• Impulsive waves – These waves move in the same direction as the overall trend and are trend-supportive.
• Corrective waves – These waves move against the overall trend. They usually occur in a series of five.

How to Apply Elliott Wave Theory

According to Elliott Wave Theory, prices move in five patterns:

• During an upward trend in the market, a five-way rise is followed by a three-way fall.
• During a downward trend, a five-way fall will be followed by a three-way rise. 

The five-way patterns are called impulse waves. And the three-way patterns are called the corrective waves.

• During an ‘impulsive wave’, the price rise is in phase one of the uptrend. Investors should expect a change in trend in this phase. 
• When the chart is on wave two, prices don’t fall much. But when wave three forms that are the time, the trend rises. This means positive news for the market.
• When wave four forms, prices decline because of profit booking. This also indicates an optimistic outlook from investors, who get positively inclined market news.

The secret to mastering the Elliot Wave theory is to correctly identify these wave patterns. These patterns tend to occur over and over again in the market. The impulse wave has five price movements – Three are in the direction of the market, and two are in the opposite direction of the market, as shown in the below graph:

The most important thing while trading via Elliot Wave Theory is the ability to identify these waves as they are forming. This way, a trader can recognize what is happening in the market and exactly where they are in the Elliott Wave pattern. Eventually, the trader can recognize whether the market will fall or rise. 

5 Tips to Excel Using Elliott Wave While Trading

Here are five tips that will prove to be beneficial for traders to excel in trading while using Elliot Wave Trading:

➢ Identifying Trend – It is very important to identify the dominant trend. If the five waves are advancing, it means the overall trend is up. Similarly, the five waves are declining, which indicates the trend is downward. The direction of the dominant trend is the path of least resistance. Hence it is easier to trade.

➢ Identify Countertrend – Elliot Wave Theory also identifies the countertrend moves. Knowing that a recent price move is merely a correction within a larger trending market is especially important. These counter-trend changes are opportunities for traders to correct their trades towards the larger trend.

➢ Determine the Maturity of a Trend – The large and small waves help traders determine at which stage the trade is. If a pattern has completed three or four waves, a trader should know that it is not the time to add long positions.

➢ Provides Price Targets – This is one of the best features of Elliot Wave theory that is it offers high-confidence price targets. These high-confidence price targets allow traders to set profit-taking objectives or identify regions where the next turn in prices will occur.

➢ Provides Specific Points of Ruin – There are certain rules while trading the Elliot Wave Theory, which defines whether the trade is investment-worthy or not.

• • • Rule 1: Wave 2 can never retrace more than 100% of wave 1.
    • Rule 2: Wave 4 may never end in the price territory of wave 1.
    • Rule 3: Out of the three impulse waves 1, 3, and 5, wave 3 can never be the shortest.

“If the trade is not following the above rule, it is better to exit the trade and save losses.”

Conclusion & Recommendation

The Elliott Wave analysis has surpassed the test of time. If you are keen to learn to trade, understanding the Elliot Wave theory is a good starting point to building a fortune from trading.

There is no denying the fact that there are many theories and strategies for implementing Elliot Wave in trading. But it all depends on the trader’s experience and how well he/she can identify the entry and exit points.