Elliott Waves: what are they and how to apply them in trading in practice

Методы и инструменты анализа

What are Elliot waves in practice, examples of wave theory, rules and strategy, indicators and charts, tools in terminals for building Elliot waves. Many calculations in trading are based on graphical components. They allow you to see all the risks, make timely transactions or move away from them in order to reduce the likelihood of losing money. One of the varieties of methods of graphical technical analysis is a technique called Elliot waves.

What is the indicator and what is its meaning, the essence of the Elliot wave analysis

Starting to study the Elliott wave analysis, it should be noted that a similar theory arose back in 1930. It is based on the understanding that prices develop at the time of trading in certain cycles. They consist of impulse and corrective waves. This method of analysis began to be actively used in the stock market only in the 1980s, when the results of the practical application of this indicator were obtained, by which its efficiency became clear.

Elliott Waves: what are they and how to apply them in trading in practice
Cycles in Elliott wave analysis [/ caption] Now the basis of application is the behavior of traders. The reason is that it is their actions that lead to the fact that certain changes occur in the market. Therefore, a certain wave is traced after each change or action taken. From here it is possible to define the studied indicator.

Elliot wave analysis is a graphical method of technical analysis of the situation in the stock market. It is a continuous process of development with all the changes taking place. This includes the situation in society and its individual groups, in the financial markets, including the formation and implementation of special recognition models.

The indicator must be carefully studied, because thanks to it, even a novice trader can quickly and fairly accurately assess the behavior of all participants in a particular market. This is done by studying the direct movement of price waves. The essence of the analysis in this case is that each trend present on the market at a given time has its own structural sections. They are called waves. Their peculiarity lies in the fact that they are often repeated. Experts distinguish 2 types of waves:

  • Pulse.
  • Corrective.

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Elliott Waves: what are they and how to apply them in trading in practiceBuilding Elliott Waves on a chart

If impulse wave analysis is selected in trading, then such patterns tend to move along the main trend. In the case where the corrective view is preferred, the charts show movement adaptation directly below them. In this case, a key analytical figure deserves attention. It is presented as a combination of impulse and corrective wave. An example of what a chart might look like:
Elliott Waves: what are they and how to apply them in trading in practiceIt can be seen here that 1-5 are designations indicating that an impulse type of formation has arisen. The letters on the graph are marked for additional convenience in understanding the image correction. If you follow the theory of Elliot waves, it will become clear that in every trend there is a combination of fives and threes. This means that there are combinations of impulse and corrective models, which ultimately allow you to get maximum profit during trading or to avoid loss. There is also a five-wave model of this indicator. The bottom line is that the market price movement can be seen on the chart in the form of 5 waves. An example chart looks like this:
Elliott Waves: what are they and how to apply them in trading in practiceOn the chart that will line up in this case, it is clearly seen that under the designations 1,3 and 5 are waves, which are essentially impulsive (lines on the chart of directional movement). The next important point, which can also be seen on the wave chart, is expressed in the fact that the 2nd and 4th waves in this case are corrective (some traders also refer to them as retracements). They move in the opposite direction, indicating the current situation in the market and showing what needs to be done to avoid losses during trading. This can be compared to magnetic poles – “plus” and “minus”. Such a model has the following properties, which, with the proper level of training and experience, will help to recognize the moments when advantageous situations arise:

  • The 2nd wave does not overlap on the image the starting point at which the 1st wave began to move (this never happens and under no circumstances in the market).
  • The 3rd wave will never be the shortest one that can be seen on the resulting chart.
  • The 4th does not enter the price category that belongs to the 1st wave.


Elliott Waves: what are they and how to apply them in trading in practiceThe ratio of waves in the Elliot wave analysis [/ caption] Impulse models form in most cases exactly a 5-wave structure. 3 waves with different variations are more typical for corrective patterns. It is necessary to pay attention to the fact that in such a case there is a feature – in one complete cycle, 2 phases and as many as 8 waves can be counted. In the process, a 5-wave driving phase is formed. On the graphs, it is displayed in numbers. After that, the next phase appears, which is represented by 3 waves and is corrective. It is displayed in letters on the graphs. If the condition is met that wave 2 corrects wave 1, then the letter waves correct the full cycle sequence (1-5). It should be noted here that each such trend will last for a certain time. During the period, all 5 waves are formed. After that, a correction may follow. Sometimes it is not observed. If it is absent, then 2 waves will be traced. All of them are impulse type. The structure will in this case be represented by 10 separate and well-separated (noticeable) segments. Interestingly, odd waves for professionals during the trading session are fully characterized as impulsive. This happens because they follow the movement of the indicated trend, set earlier and approved by the person himself (the player in the market). Even waves on the chart in this case will be manifestations of a corrective component of the analysis. https://articles.opexflow.com/trading-training/dlya-nachinayushhix.htm The structure will in this case be represented by 10 separate and well-separated (noticeable) segments. Interestingly, odd waves for professionals during the trading session are fully characterized as impulsive. This happens because they follow the movement of the indicated trend, set earlier and approved by the person himself (the player in the market). Even waves on the chart in this case will be manifestations of a corrective component of the analysis. https://articles.opexflow.com/trading-training/dlya-nachinayushhix.htm The structure will in this case be represented by 10 separate and well-separated (noticeable) segments. Interestingly, odd waves for professionals during the trading session are fully characterized as impulsive. This happens because they follow the movement of the indicated trend, set earlier and approved by the person himself (the player in the market). Even waves on the chart in this case will be manifestations of a corrective component of the analysis. https://articles.opexflow.com/trading-training/dlya-nachinayushhix.htm because they follow the movement of the indicated trend, set earlier and approved by the person himself (the player in the market). Even waves on the chart in this case will be manifestations of a corrective component of the analysis. https://articles.opexflow.com/trading-training/dlya-nachinayushhix.htm because they follow the movement of the indicated trend, set earlier and approved by the person himself (the player in the market). Even waves on the chart in this case will be manifestations of a corrective component of the analysis. https://articles.opexflow.com/trading-training/dlya-nachinayushhix.htm

How to use, setup, trading strategies based on Elliot Waves

Qualitative analytics and Elliot wave forecasts make it possible to understand that when such a solution is used in practice, then there is a search for entry points into trading transactions. A pronounced signal in this case is the formation of an unforeseen and difficult to predict impulsive movement. You need to trace it from the place directly on the chart (available or just emerging in the process of trading), in which the trend reversal occurs. Here it is important to take into account that when an upward movement is noted, the entry into positions is carried out in one of the impulse waves. The conservative method of entering transactions related to trading, according to the Elliott wave theory, is divided into a moderate subspecies and a similar one. If a moderate option is chosen for use, then the initial conditions for opening a transaction will be almost identical to the conservative method. The difference is that a buy order is placed at the level where the end of the wave is visible, which is indicated on the charts as B. In case of a special need, the transaction is closed. Elliott wave analysis – what it is and what it is, quickly, clearly and adequately in practice and examples: https://youtu.be/KJJn_r-f8aw A moderate method of entering positions is already considered aggressive. It lies in the fact that a trade is opened after the breakdown of the signal line. It is believed that such an event indicates the beginning of the formation of a new impulse pattern. The analyzed analysis is used by professional traders. It will be difficult for beginners to apply such strategies. The reason is that wave analysis, which is simple and understandable in theory, turns out to be very difficult to apply in practice without a base of additional knowledge. The charts are built in real time, so you need to be able to track the state and changes in the market quickly. Experts recommend combining the method with additional indicators, such as Elliot Waves and Fibonacci Waves. This will be displayed on the charts as follows: An additional indicator in this case indicates the golden ratio of prices in the dynamics of their movement in the market.
Elliott Waves: what are they and how to apply them in trading in practice

When to use wave analysis, on which instruments, and when not to

The use of Elliot waves and an additional indicator is recommended when it is necessary to achieve a smooth visualization of waves on the charts. You can use tools that help this process. They can also be used in case of independent detection of wave patterns. For example, the EWO indicator is used. It is noted (as well as all other types of indicators) on the selection of a wave. The following types of tools are also used:

  • Elliott Wave Indicator.
  • Elliot.
  • WaveProphe.

Elliott Waves: what are they and how to apply them in trading in practiceEWO is a tool that is an indicator for conducting professionally verified and most detailed technical analysis. It indicates the process displayed on a separate position (scale) from the price chart. It is built and displayed then based on the difference. It should be noted that the tool itself does not use the rules for detecting waves during construction. At the same time, it allows you to visually smooth out fluctuations that arise for quite natural reasons, which can be seen in the smoothness of the graphs. This feature allows you to clearly distinguish individual waves and track all changes. If the area between the lowest and highest points is visible, then this direction corresponds to the upward movement of the wave. If at the same time the indicator lies in the zone above, the one that denotes the zero line, then there is an impulse upward wave on the chart. In the case when the section of the top and bottom coincides with the wave that is directed downwards, the indicator also lies below the zero line, then the section coincides with the corrective downward wave. If the conditions are not traced, then it is not recommended to use such a technique, since you can enter into losses.

Pros and Cons of Elliot Wave Analysis

The advantages and disadvantages also need to be carefully considered before applying the theory. The pros will be as follows:

  1. Can be used on different timeframes .
  2. The graphs show the big picture.
  3. With the help of waves, you can build not only tactics, but also a trading strategy.
  4. Waves allow you to determine the presence of the actual trend, which will then be traded.
  5. They allow you to make a forecast for the likely price dynamics.

https://articles.opexflow.com/trading-training/time-frame.htm There are also disadvantages to take into account:

  • Graphs can be perceived subjectively.
  • There is a complex system of rules.
  • It takes time to fully explore the features.

It should also be noted that if a trader does not have the relevant experience, this can lead to trading losses. Often, an outgoing impulsive movement can be observed after accumulation on a local bottom. Another example of waves: a figure is formed on the chart, which is called “
Head and Shoulders ”. Also, elements of the theory can be traced if a figure is built equal to the height of the “head” from the “neck” line.

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