Trade Forex Trading

The Elliot Wave Theory

This is a form of trading analysis that traders and other traders use to forecast price trends in the markets by identifying extremes in investor psychology, highs and lows in trading prices, & other collective activities. This theory model shows that collective human psychology forms in natural patterns over time, through buying and selling decisions reflected in the market prices.

This trading theory of analysis was developed by Ralph Nelson Elliot that is based on the theory that, in nature, many things happen and occur in a five-wave pattern. These patterns are also applied to trading analysis, to analyze the behavior of XAUUSD market trends using this trading analysis theory.

When this theory is applied to XAUUSD, the assumption is that the market will move in a pattern of five waves - three upward moves, numbered 1, 3 & 5 - which are separated by 2 downwards moves, number 2 & 4. When the three up moves (1,3,5) are combined with the 2 down moves (2,4), they form the 5 Wave trading pattern.

The theory further holds that every five-pattern up move will be followed by a downward pattern move also consisting of three-pattern down moves - this time, 3 down ones are not numbered but use the letters A, B and C. So as to differentiate these from the 5 ones for the up move.

5 & 3 Wave Pattern

Main trend will comprise of 5 moves while the price retracement will comprise three moves.

Five pattern (dominant trend) - uses 1, 2, 3, 4, 5

3 pattern (corrective trend) - uses A, B, C

Elliot Wave Gold Theory - 5 and 3 Wave Elliot Count Rules in Trend - Elliot Wave Setup on Chart Trend

This article is about how to trade online markets using the Elliot Theory as the driving force of xauusd. This model relies heavily on looking at price charts. Technical analysts use this theory to study developing trends to identify the waves and discern what trading prices may do next.

By analyzing these patterns on a chart and applying the Elliot Theory, traders are able to decide where to get in and where to exit by identifying the points at which the market is likely to turn.

One of the easiest places to see this theory at work is on the market, where the changing investor psychology is recorded in the format of price movements. If a trader can identify repeating patterns in trading prices, and figure out where these repeating xauusd pattern is relative to the Elliot pattern counts then the online trader can predict where prices are likely to head to.

Rules for Elliot Count

Based on the market patterns formations formed by this theory, there are various guide-lines for valid Counts:

  1. Wave 2 shouldn't go below the beginning of Part 1.
  2. Wave three should be the biggest among Part 1, 3 and 5.
  3. Wave 4 should not over-lap with Part 1.

Five pattern (dominant trend)

5 and 3 Wave Elliot Count Rules in Trend - Elliot Wave Setup on Chart Trend

1: This one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental data analysts continue to revise their estimates lower: the beginning of a new trend probably does not look strong. Sentiment surveys are still bearish and the implied price volatility in the market is high. Volume might increase a bit as market prices rise, but not by enough to alert many trading analysts.

2: This one two corrects 1, but can never extend beyond the beginning point of wave one. Typically, the news is still bad. As market prices retest the prior low, bearish sentiment quickly builds, & "the crowd" mentality reminds all that bear market is still in place. Still, some positive signs appear for those that are looking: volume should be lower during 2 than during 1, prices usually do not retrace more than 61.80 % of 1 part one gains. Price will reach and get to a low that is higher than previous low resulting into a higher low.

3: This is usually and generally the largest and most powerful move upwards, larger than 1 & 5. News is now positive & fundamental analysts begin to raise estimates. Prices rise quickly, corrections are short-lived & shallow. Anyone looking to get in on a pull-back will likely miss the boat. As three starts, the news is probably still somewhat bearish, & most traders remain negative: but by part three mid-point, the crowd will often join in & agree that the new sentiment in the market is bullish. Wave 3 will extends beyond the highest level reached by 1.

4: This is typically and clearly corrective. Prices might move sideways for an extended period, and 4 typically retraces less than 38.20 % of 3. Volume is well below that of wave number 3. This is a good place to buy a retracement if you understand the potential that is ahead for a Part 5. Still this 4 is often frustrating due to their lack of progress in the larger upward trend.

5: This is the final phase in the direction of the dominant market trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average traders finally buy in, right before the price touches/tests the top. Volume is often lower in wave 5 than in wave three, and many momentum technical indicators start to show divergences (gold prices reach a new high but the indicators do not reach new highs). At the end of a major bullish market trend, bears might very well be ridiculed, for trying to pick a market top.

3 Pattern (Corrective Trend)

Corrective Trend - Elliot Wave Pattern on Chart Trend

A: Corrections are typically harder to identify than the impulse moves. In A of a bearish market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still active bullish market. Some indicators that accompany A include increased volume, rising and implied volatility and possibly a higher open interest in selling/shorting.

B: Prices reverse and move slightly higher, which many see and interpret as a resumption of the now long gone bullish market trend. Those familiar with classical technical analysis may see the peak as a right shoulder of a head and shoulders reversal xauusd pattern. The volume during B should be lower than in A. By this point, fundamentals are probably no longer improving, but they most likely and probably have not yet turned negative.

C: Prices move impulsively lower. Volume picks up, and by the third leg of C, almost approximately and roughly everyone realizes that a bearish trend is firmly entrenched. C is typically at least as large as A & often extends to 1.618 Fibonacci extension level beyond A lowest point.

More Topics and Tutorials:

Forex Market Traders Seminar Gala

Forex Market Traders Seminar

XAUUSD Broker