Wave analysis is so complex that only a few professional Forex traders are fluent in it. But every successful player in the market must know its BASICS.
Why do you need the basics of wave analysis? Then, to understand and see:
Let's look at the CAD / JPY (H4) chart from the point of view of MF wave analysis (modification of Elliott VA), combined with other MF instruments.
Rice. 1. Price movement on the example of the CAD / JPY currency pair
Comments MasterForex-V:
Once again, carefully examine and then analyze the drawing from the closed forum of the MasterForex-V Academy. We are well aware that this is very, very difficult. But you have the opportunity right now to make an informed choice and decide what to do next:
How much can you earn by choosing the path of study at the MF Academy? As the experience of autocopying transactions of students of the Academy who use this service during training shows, on average, it turns out from 250 to 500% per year in foreign currency and on break-even, win-win vip accounts, which allow combining the following opportunities:
- The trader's own earnings (100-200% per year).
- 150% of the NordFx bonus participating in the drawdown (with a 3K deposit, you are credited with 7.5K to the account with the right to withdraw profits in excess of this amount), or 100% of the bonus from other brokers. This bonus increases your profit by 2.5 times for every dollar invested. So, 100% of the profit from 7.5K turns into 250% of your money invested (3K).
- and 15-20% of the profits, which are transferred to managing traders by numerous investors from Israel and the EU to the USA and China.
So is it worth studying wave analysis or should you skip it? Those who answered yes read further:
- In this chapter - about the general features and differences of technical and wave analysis (the same patterns of reversal and trend continuation through the eyes of the "waveman").
- In the next chapter - (a summary of the books by Frost and R. Prechter, Balan, Vozny, etc.).
- In the third chapter -.
What gives a trader wave analysis and its difference from classical technical analysis
Wave analysis:
- Helps to find the beginning of a trend, considering the movement of currency pairs not from the point of view of reversal patterns and trend continuation, but from the position of an internal algorithm - impulse waves (trend) or correction (flat).
Let's compare the “head and shoulders” trend reversal pattern in the classical technical analysis of trading (in Fig. 2 on the left) and the same trend reversal pattern from the point of view of the wave analysis. It turns out that the downward fall was only a correction (pullback). Therefore, at the end of wave C, you need to open a buy deal.
Rice. 2. An example of technical and wave analysis of the same market situation
This wave counting helps to understand why there are numerous complaints about the head and shoulders pattern. As soon as a trader opens a sell order, the market goes ... in the opposite direction.
- It helps to CONSCIOUSLY take profit, determining in real time WHERE and on WHAT wave you open an order in the market. Wave counting more accurately suggests market entry points than “” or any other method of technical analysis.
Rice. 3. Selecting points for entering the market by wave analysis
- Shows the impulse targets (138-162% and higher) along the trend and in the correction (38-76%).
Rice. 4. Targets of impulse 3rd and 5th waves of the trend
Rice. 5. Targets of correction - 38-62%, or a maximum of 76%
Thus, a Forex trader understands what levels the price tends to, where and why it is necessary to open and close deals.
- Helps to easily find flat (waves a-b-c in both directions).
Rice. 6. The market is in a flat state
None of the traders like flat. Wave analysis helps to determine it online, when CORRECTION waves go both up and down (a-c-c). This means that there is a correction in the OLDER TF, after which a strong and powerful impulse will begin.
It is better to wait this correction out of the market, which you will always be advised on the closed forum of the MF Academy.
- Provides the ability to IDENTIFY any trend continuation pattern (flag, pennant, etc.) as corrective waves.
Rice. 7. Pattern of trend continuation in the form of correction waves
Allows you to understand where to put your feet (locks, locks). Wave analysis provides a clear answer to this important question. For example, when the price is below the bottom of the first wave (the trend is canceled) or below the bottom of the wave of an older TF.
Rice. 8. End of the trend
From all of the above, we can conclude: without knowing the BASICS of wave analysis, your profit in Forex can only be random.
What the trend looks like in real time (from the materials of the MasterForex-V Academy)
Look for clear signs of a bullish trend(fig. 9):
- 1st bullish wave(purple) has a 5-wave structure. This is a sign of momentum and a POSSIBLE trend change from bearish to;
- 2nd wave(yellow) has a CORRECTIVE ABC structure and does not break through the base of a new bullish wave. When its maximum is broken, the third wave, beloved for all traders, begins;
- 3rd wave(gray), which also has a five-wave structure on lower timeframes (1st in 3rd, 3rd in 3rd, etc. with targets higher than 162% up from wave 1).
Rice. 9. Signs of a bullish trend by wave analysis
AO or MACD indicators for the 1st wave (purple background) confirm the beginning of the bullish trend. The following conditions are required here:
- 1st sub-wave: the histogram goes above 0 on a bullish trend;
- 3rd subwave: AO histogram is above the 1st wave;
- 5th wave: divergence. The histogram is below the top of the 3rd wave (entry below 0 is possible).
How Bill Williams increased his trading deposit from $ 10,000 to $ 198977 using wave analysis
Bill Williams in his book "Trading Chaos" gave perhaps the most powerful impetus to popularize the wave analysis of trading. In a simple and accessible form, he showed how to determine the 1st wave (point 0 on the chart). Then, in his opinion, you just need to follow the trend, opening trades in accordance with the main direction of price movement (see Fig. 10).
Rice. 10. The beginning of the first wave and the trading plan according to Bill Williams
For their part, the teachers of the MasterForex-V Academy drew up a detailed plan for capital management (money management), explaining the logic of opening and closing deals (see Fig. 11).
Rice. 11. Money management according to the MasterForex-V Academy system
For those who are already convinced of the need to study the basics of wave analysis, we suggest that you familiarize yourself with the special literature on this topic and visit the following Internet resources:
- Free illustrated magazine of traders "Birzhevoy Leader".
For a deeper study of the Basics of Wave Analysis, we recommend reading the following books:
- A. Frost and R. Prechter. The Complete Course on Elliott Wave Law
B. Williams "Trading chaos".- R. Balan Elliott Wave Principle - Application to the FOREX Market.
- D. Vozny. Elliott code. Wave analysis of the Forex market.
- G. Neely. Mastery of Elliott Wave Analysis.
- C. Miller. Investigation of the relationship between the theories of cycles and Elliott waves.
- R. Fisher. New Fibonacci trading methods.
- R. Fisher. Subsequence. Applications and strategies for traders.
- E. Peters. Fractal analysis of financial markets. Application of chaos theory in investment and economics.
- D. Di Napoli. Trading using Di Napoli levels.
- R. Swannell. Market forecast based on a new refined wave-based pattern recognition system.
- A. Frost and R. Prechter. The Elliott Wave Principle is the key to understanding the market.
- T. Joseph. Simplified Elliott Wave Analysis. Practical application of a mechanical trading system.
- D. Murphy. Technical analysis of futures markets.
- A. Cherepkov. The theory of Long waves by ND Kondratiev.
- E. Nyman. Small encyclopedia of the trader.
- A. Kiyanitsa, L. Bratukhin (ed.). Fibonacci levels. Where the money is.
- M. Chekulaev. Fractals.
- V. Safonov. Practical use of Elliott waves in trading.
You can easily find all these books by searching Yandex or Google. We recommend starting with these books:
- A. Frost and R. Prechter provided truly the most Complete Course on Elliott Wave Law. This is the main fundamental work on wave analysis of all areas of trading (commodity and commodity markets, stocks, futures, Forex).
- The books by D. Vozny (translator of Prechter into Russian) and Balan are an applied application of wave analysis to the Forex market.
- Bill Wilms' work "Trading Chaos" is a more popular publication for a wide range of potential traders. It provides the basics of wave analysis. The author has connected them with his Profitunity trading system, which consists of indicators: Alligator, Awesome Oscillator (AO) and Fractals, as well as a bullish / bearish reversal bar pattern.
In order not to get confused in the many clever advice from these books, before reading them, we strongly recommend that you study the material of our next chapter: Here you will find a short summary of the mentioned works.
Wave analysis of the Forex market is the prerogative of confident and recognized currency exchange traders.
Unfortunately, more and more novice traders use other people's mistakes and do not want to do them on their own, relying on private traders who blog on the Internet.
In trading on the foreign exchange market, it is very important for every trader to be able to correctly identify market fluctuations. This is a sign of the trader's success and experience. For this, you can use the wave analysis of the Forex market.
The history of the emergence of the Elliott wave theory
The Elliott Wave Theory was developed by Ralph Nelson Elliot in the 1920s. He found that market behavior that had previously been seen as chaotic was in fact cyclical.
He also determined that such market cycles were the result of the trader's reactions to external events, which can also be called crowd psychology. Elliot noticed that up and down swings in crowd behavior always resulted in the same repetitive patterns, which he later called "waves."
Market predictions with wave analysis
Elliot made detailed market predictions based on the unique characteristics he discovered in wave patterns. An impulsive wave that moves in the same direction as the dominant trend always shows five waves in the pattern.
On a more detailed chart, five component waves can be found within each impulsive wave. These waves are considered different stages in the Elliott Wave Principle.
In the Forex market, as in other financial markets, traders know that “every action becomes a source of positive and negative reaction”, just as a price swing up or down must be followed by an opposite swing. Price swings are divided into trends and corrections or sideways swings. Trends show the main directions of price movement, while corrections fluctuate against the trend. Elliot called this impulse and corrective waves.
Forex Wave Analysis Patterns
The theory of wave analysis of the Forex market is interpreted as follows on five patterns:
- Every hesitation has its consequences.
- Five waves move in the direction of the dominant trend, followed by three corrective waves.
- The movement of these waves is called the “wave 5-3” and it completes the cycle.
- Each previous wave 5-3 becomes part of the next higher wave 5-3.
- The basic 5-3 wave pattern remains stable, although the time span of each pattern may vary.
In order for a trader to use wave analysis of the Forex market in daily trading, he needs to learn how to identify the main wave and then buy a long position, which he will subsequently sell, or take a short position when the pattern expires and its reload is inevitable.
The mathematical basis for using the Forex wave analysis is provided by Fibonacci numbers. They play an important role in the design and creation of the complete market cycle, which is described using Elliott waves. Each cycle that Elliot identified consists of ranges in which the waves move, and the ranges are determined by a sequence of Fibonacci numbers.
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To predict the development of the market situation, a wide range of different methods and tools are used today. Among them, a special place is occupied by the Elliott forex wave analysis. The basis of this technique is the assumption that the movement of quotations of any asset is characterized by a wave character. Conventionally, it can be compared with the ebb and flow in water bodies. That is, price movements are divided into impulses and corrections, after analyzing which you can choose the optimal time to conquer the market. On this page you will find professional wave analysis from leading forex brokers today and longer time frames.
Elliott analysis is actively used in their work by both beginners and more experienced Forex traders. At the same time, forex wave analysis can provide for several different options for determining waves. To solve this problem, the most popular criteria are the closing price indicators, the maximum, minimum and average value of quotes within a certain period of time. Today, for the forex market, this technique has a fairly high predictive value. In addition to everything, current wave analysis provides an opportunity to work on Forex on any timeframe.
When using this analysis, we recommend that you pay attention to the wavelength to minimize risk and set the correct stop-loss. So, for example, the size of the corrective waves is directly proportional to the indicators of the corrective waves. To save time and get quality analytics for studying the Forex market from reliable experts, we advise you to carefully study the fresh and relevant Elliott Forex wave analysis from reliable brokerage companies.
- a graphical method of technical analysis that allows evaluating the behavior of market players based on the study of price movement waves. The basic postulates of the system were formulated in the mid-thirties of the last century.
The creator of the theory is Ralph Elliott, but the famous financier Robert Prechter made an equally significant contribution to its development and popularization.
Description of Elliott Wave Theory
The basis of Elliott's theory is the observation that each trend consists of certain base sections (waves) that are constantly repeated.
There are two types of waves on the market - impulse and correctional.
The former move in the direction of the main trend. The second, respectively, are corrections to them. The main pattern of the wave analysis consists, in fact, of one impulse and one corrective wave (1-2-3-4-5 / ABC). It, in turn, is divided into impulse and corrective waves of the lower order.
Impulse waves are designated by numbers from 1 to 5, corrective waves - by letters A, B and C. According to Elliott's theory, each trend is a combination of such "fives" and "triples".
Any trend lasts until five waves are formed, after which it either unfolds or adjusted... In the latter case, three corrective segments are further formed. In total, within the framework of such a rise-fall cycle, there are eight waves. If there was a reversal, then we see two impulse waves formed by ten segments.
Let's break down the structure in the above screenshot. Elliott waves 1,3 and 5 are impulse... They follow a general trend. Waves 2 and 4, respectively, corrective.
In the correctional structure ABC, the situation changes somewhat. Since this structure is included in the general downward wave (corrective), waves A and C are considered impulsive here, and wave B, directed upward, will be corrective.
The Elliott Wave Advantage
lies in the fact that such structures can be found both in the upward and downward markets. In the latter case, we are talking about a mirror image of a bullish structure. That is, all impulse waves 1,3 and 5 will be downward, and 2 and 4 - upward corrections. Accordingly, in the correctional wave A and C will be upward, and B - downward.
It is important to note that the structure of the trend is independent of time scales.
Video - Elliott Waves
Elliott Wave Rules
It is not so difficult to identify five or three areas in any trend by eye. Roughly speaking, anyone who can count to ten can do this. The problem is that two traders analyzing the same chart may well come to absolutelyopposing views regarding its structure. To remove the subjectivity of visual assessment, the basic rules for the formation of waves were developed. Some of them were created by Elliott himself, some were later added by other theorists.
Let's start by listing the basic rules:
- The second wave of impulse should not go down to the level of the starting point of the first wave. If this happened, then it is worth questioning the very fact of the trend development.
- The third wave of the impulse must exceed the extremum of the first. In addition, it cannot be the shortest of the three impulse when it comes to large-scale time intervals.
- The fourth wave of impulse cannot go below the extremum of the first one. This rule is sometimes neglected in real market trading, but in such cases the following condition must be met.
- The fifth wave of the impulse should be above the extremum of the third.
Additional
- Corrections within a pulse should differ in complexity, nominal size, or shaping time. If there are no differences in at least one of these parameters, the development of the trend should be questioned. There is a possibility that a complex corrective pattern is being formed at the moment.
- In an impulse structure that meets all the requirements, one of the driving waves must be stretched, that is, exceed the other two in nominal size.
- Three adjacent waves, which are part of the impulse, must be formed at different times in duration.
Based on the above rules, a trader can distinguish between impulse and corrective structures. If the wave meets all the requirements, thenit belongs to the first type. If the conditions are not fully met, this is either a correctional structure or an impulse that has not yet been formed.
- If the third wave is greater than the fifth and the first, then the latter will be approximately equal in length. This recommendation can be useful when analyzing the end of the fifth wave. Even if the fifth wave is longer than the third, and the third is longer than the first, we can still calculate the end of the fifth wave. For this we need the top of the fourth wave.
- In the process of observing the wave structures, another interesting regularity was revealed - the sizes of correctional waves 2 and 4 can be different, and they alternate from time to time. For example, if the correction in wave 2 was strong enough, then it will be insignificant in wave 4 and vice versa. Using this recommendation, you can roughly calculate the correction time in the fourth wave. If, for example, there was a significant and rapid correction in the second wave, then in the fourth it will be calmer.
- Another interesting fact. Completion of corrective wave ABC should take place at the level of wave 4 (low).
The Elliott Wave theory in practice starts with charting. To solve this problem, it is better to use indicators, some of which we will talk a little below. Experts recommend using a standard candlestick chart for analysis, as the most informative and objective. Elliott waves on the chart:
- The first step is to identify a significant pivot point. For this, you can use a tool such as a signal line. From the moment of its crossing, the period begins, which we will consider.
- After the pivot point is determined, we should assign names to all the waves of interest to us. This is a rather complex process, on the correct implementation of which the quality of the subsequent analysis directly depends. It is important to remember that an assigned structural designation cannot be subsequently revised unless there are compelling reasons to do so. The choice of the time frame remains with the trader, but it is recommended to use segments no longer than thirty monowaves. Further, movement marks are placed.
- At the final stage, the wave is compacted, that is, the corresponding structural designation is assigned to it in a similar system of a larger scale. Thus, gradually the entire chart will be assembled into one of the basic Elliott patterns.
Now the trader sees the construction of the market and can predict how it will develop further.
Elliott waves in practice
The most common reason to trade the Elliott system is the presence of an impulse wave from a trend reversal point. Positions should be opened in one of the three driving sub-waves, however, one should be careful, as there is always a possibility that the chosen structure will turn out to be a component of a larger corrective pattern. After the formation of the impulse wave, it is necessary to wait for the first correction. Its completion is a signal to enter the market.
Conservative method
After the movement in the direction of the initial impulse has resumed, a signal line is drawn through the pivot point and the point of the supposed completion of the correction. A buy position is opened at the high of the first driving wave. If the price movement did not reach the order and reverses, breaking through the signal line (this happens in the case of a complex correction), you need to make sure that it does not fall below the pivot point. When growth resumes, the line is corrected at a new low.
If the position was opened immediately, you need to continue to follow the signal line. As soon as the price drops and touches it, the trade is closed and a new order is placed at the extreme high. You should not be upset if, after touching the "signal", the price curve immediately again goes in the direction of the trend. This is a working moment, which should be treated philosophically, besides, the resulting loss can still be compensated for by a new contract.
Moderate and aggressive methods
The initial conditions for opening a position with a moderate strategy are similar to conservative trading. The difference is that the order is placed at the end point of the corrective wave B. It should always be remembered that the expected correction may be prolonged. Correction of the signal line and exit from the position is carried out according to the same principle as in the previous method. This option is recommended for novice traders.
With an aggressive strategy, an order is placed only after the signal line is broken. It is believed that the very fact of such an intersection indicates the completion of the structure and the beginning of the formation of a new model.
Elliott Wave Indicators
There is no ideal indicator for plotting Elliott waves, but a variety of modifications allows each trader to find the most suitable option for his style. Let's consider several popular tools.
Elliott wave oscillator
This is an indicator on the chart of which a histogram is displayed (by analogy with). The highest peaks correspond to the third driving wave of the impulse. It can be used on almost any timeframe, however, too short intervals are not recommended.
When the histogram crosses the bottom / top zero mark, a divergence is formed, indicating the completion of the next wave cycle. If at the moment of the first corrective movement the oscillator breaks zero in the opposite direction, the formation of wave 3 should be supported by another divergence. If it is absent, we can assume that the starting point of the model is determined incorrectly.
The fall of the histogram by 30-50% relative to the local extremum indicates the end of the third wave and the beginning of the formation of the second correctional segment. The divergence also speaks of the completion of the formation of the fifth wave - the rise / fall of the price chart is accompanied by a decrease / increase in the bars.
According to the first rule of trading, first you need to wait for the confirmation of the final crossing of the zero level. If the trend is upward, the indicator histogram is displayed above the middle level, if the downward trend is below the middle level. The position is entered after the first divergence. A rising price and a falling oscillator indicate a sell, and a reverse divergence indicates a buy. You can enter after the correctional movement goes down / up by about a third relative to the first impulse wave. Stop loss is usually placed at the extreme level and the trade is closed immediately after the formation of a new divergence.
Elliott Wave Prophet and Watl
The Wave Prophet indicator is quite popular among Elliott Wave traders. With its help, you can not only see the completed movements, but also predict the further direction of the price. The wave pattern on the chart is built automatically. If a trader thinks that the initial conditions were determined by the system erroneously, he can always set them on his own.
Watl is a convenient indicator that not only clearly displays wave patterns, but also draws trend lines. The user can see the trends of different timeframes and the forecast of the future trend. As mentioned earlier, no optimal indicator for the implementation of Elliott's theory has yet been invented. The listed tools can be considered the most effective at the moment, but they are still far from perfect. However, this in no way diminishes their merits and benefits for traders.
Criticism of Elliott Wave Analysis
Elliott waves are often criticized. Many opponents of this method believe that there is little practical benefit from it, since it is quite subjective. Moreover, there are opinions of real practicing traders that this type of market forecasting rather contributes to the emergence of losses than profits.
What exactly do critics of wave analysis pay attention to?
First of all, they point out that price movements cannot be predicted using such a framework. The price can deviate significantly from the drawn waves. In addition, there is a subjective factor here. After all, waves, like other types of graphic patterns, can be seen literally in any formation, if desired.
Some critics point out that wave analysis is a method with a lot of nuances that are not clear to most traders. For example, it is not always possible to determine in the trading process where the waves begin and where they end.
Critics also point out that the best Elliott waves can only be identified on historical charts. As for working with this theory in practice, it is practically impossible due to a large number of factors.
Elliott Motive and Corrective Wave Videos
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