“Elliott Wave Theory” was developed by “Ralph Nelson Elliott” in the early 1920’s. Elliott has focused on and analysed the interaction of up and down price movements with social psychology and named these movements as “Wave”. Ralph Nelson Elliott has found out that factors which are the results of community psychology and external effects, cause stocks’ prices to repeat their movements in a specific circuit. Elliott has set up his work based on “Dow Theory” and explored the stocks volatility in the fractal structure of nature. Accordingly, he defined the price movements as “In-term Waves”.
There is a significant advantage of learning “Elliott Wave Theory” in Forex Trading for the traders. A Forex trader may foresee the markets’ trends with an adequate knowledge of “Elliott Wave Theory” and experience it with the aid of enough Forex education.
In general; Elliott Wave Theory proceeds in the reverse order to increasing and decreasing trends of the market prices. Price patterns move from one side to another as a result of breaking in a channel. On the other hand, they make a correction. Prices signal for the main target of trends.
Ralph Nelson Elliott and the analysts believe that Elliott Wave Theory has some correlation with human psychology. And they do assume that human beings’ instant psychological acts reflect the markets as waves. Besides, “Wave Principles” were published in order to deeply understand Elliott Wave Theory.
“5-Wave Model” informs about the major trend. This model can be briefly explained as below:
In the “1st Wave” ; analysts assume that the old trend still continues and organise their revenues based on low assumptions. There is a decreasing trend and volatility is high.
“2nd Wave” corrects the “1st Wave”. There is a strong “Bear Market” perception. Generally, prices can not decrease more than 61.8% of the “1st Wave” and there is the major idea of prices should be decreased via a “3rd Wave” model.
“3rd Wave” is generally the most greatest and strongest wave of the trend. Prices increase rapidly while corrections are being formed short and temporary. Although many traders are still reacting negatively, the new increasing trend begins in the middle of the “3rd Wave”.
“4th Wave” typically signals for the right way. Price movements are volatile and trade volume is far lower than the “3rd Wave”.
If the potential of the “5th Wave” can be read correctly, it gives the investor a backspace for buying the lower prices. But traders should still be careful. “5th Wave” is the last step of the leading trend. The news is generally positive and in increasing trend. Trading volume is lower than “3rd Wave” and prices reach to new highs. But the indicators will not touch to the new peak points. Finishing off the “Bull Market” trend will occur at the end of the “5th Wave.
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