Maybe some of you are already familiar with Elliott wave theory predictions, but maybe you have forgotten this a bit.
For the next education is about Elliot wave theory prediction.
Beginning in the 1920-30s, there was a professional accountant namely Ralph Nelson Elliott.
Elliot has 75 years of experience in analyzing stocks, he says that the stock market actually forms a wave that is always repetitive, and not chaotic.
From the results of his research, he then ventured to make his theoretical book under the title The Wave Principle.
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Elliot wave theory introduction
In the book, The Wave Principle, Elliot explains that the market traded in a recurring cycle.
It was caused by investor emotions by external influences, news, or the dominant mass psychology at the time.
That the price swings up and down caused by the collective psychology of market participants always appear in the same iterative pattern.
This swing up and down he called it a “wave”.
He believes that, if the trader can correctly identify the pattern of price repetition, it can predict where prices will go next.
That is why many traders try to learn the theory of Elliot waves to be applied in their trading.
By identifying waves at the exact point where the price is most likely to be reversed.
Thus the trader can determine the price of support and resistance to determine to buy or sell.
Even though the price movement seems chaotic, it can find orders with high probability.
This is a way of analysis that people are more familiar with The Elliott Wave Theory.
This is an interesting discussion, but before learning it, we need to understand fractals first.
Fractals are structures that can be broken down into the smallest parts, each of which is a copy of a very similar shape.
Some mathematicians prefer to call it “self-similarity”.
Examples of fractals in everyday life are seashells Snowflakes are fractals. Clouds are fractals, lightning is fractals.
The importance of fractals in the Elliot wave theory is that Elliot waves can be divided into smaller waves.
Similar to the example of fractal above.
Impulse wave, in Elliott wave theory predictions
The first Elliott wave theory is impulse waves, which shows that market trends are moving in 5-3 wave patterns.
- The First 5 wave pattern is an impulse wave.
- The last 3 wave pattern is the corrective wave.
Where, Waves 1, 3, 5 are motives, which means they follow the overall trend, while Waves 2 and 4 are corrective.
Maybe a little confusing so to make it easier for us to use the image below.
Elliot wave theory predictions were original to analyze stocks, but that does not matter because this can also be applied in the forex market, crypto, and so on.
Explanation of the picture above is
Wave 1, the price starts to make an initial move to go up.
The price movements began to rise because a number of traders felt that the stock price was cheap so this was the right time to buy, so prices began to rise.
Wave 2 shows that some traders that enter in the first wave start to consider that the price was too high and time to take profits.
This causes the price to fall, but the decline does not reach the previous lows.
Wave 3, often the longest and strongest wave.
Here the price has attracted the attention of more mass public traders.
With more and more traders ordering at this price, causing higher prices. This wave has a characteristic height price that is formed beyond the height price formed at the end of wave 1.
Wave 4, traders began to take profits the price was considered too high again.
This wave tends to be weak because there are usually more people who are still holding positions and some are waiting to buy after going down.
Wave 5, this is where prices mostly get a boost because most are driven by hysteria.
So the price goes up even higher, and get on maximum prices.
Impulse Wave Extension
Remember that one of the three impulse waves, whether waves 1, 3, or 5 in the Elliott Wave Theory, will always be extended.
So there will always be one wave which is longer than the other two waves, regardless of whether it is a wave 1.2 or 3.
But according to Elliott, usually, the fifth wave is extended.
But in its development, many traders labeled the extended 3rd wave.
Correction wave is a continuation of an impulse wave after the 5-wave impulse trend starts to weaken then there is a 3-wave trend correction, many traders call them to wave 5-3.
Look at the example of the 3-wave corrective pattern below.
The picture above is an example of a correction wave marked using letters rather than numbers.
From the example above occurred on a bullish market, but that does not mean that this also applies to the bearish market.
Types of Corrective Wave Patterns
According to Elliott there are a number of 21 correction patterns from simple to complex, but to memorize all these wave patterns may seem difficult, then we will take the basic types of correction patterns.
The zig-zag formation is the steepest pattern of falling prices compared to the main trend (waves 1-5).
Usually, wave B is the shortest than waves A and C.
Zig-zag formations can occur 2 to 3 times and are continuous, but always in the order A-B-C, A-B-C, and so on.
Like all waves, each wave in the zig-zag pattern can be broken into 5 wave patterns.
The Flat Formation
The flat formation is a simple sideway waveform with generally the same wavelength.
Wave B is in the opposite direction to A and C.
Under certain circumstances, the wavelength B can be longer than A, or the peak of wave B exceeds peak A.
The Triangle Formation
Triangle wave formations are formations with a flat wave shape but are limited by convergent trend lines, or divergent. In general, triangle formations consist of 5 waves.
Fractal: Elliott Waves in Elliott Waves
As we know that Elliot waves are fractal, each wave will form sub-waves similarly.
We take the example image below.
Look at the picture above.
Waves 1, 3, and 5 consists of smaller wave impulse patterns and also Waves 2 and 4 consists of smaller wave corrective patterns.
Always remember that each wave consists of smaller wave patterns.
The pattern is often repeated forever.
There are a series of categories defined in Elliott’s Wave Theory for waves in the largest to smallest order.
- Grand Supercycle
With fractal theory, it can be understood if the Grand supercycle is formed from Supercycle, Supercycle is formed from a Cycle, the Cycle is formed from Primary and so on until the smallest Sub-Minnuette.
Take a look at the chart below on real trading.
From the chart above we see that the Elliott wave pattern is found in real trading, the numbers 1,2,3,4,5 form impulsive waves, while the letters a, b, c are the correction wave patterns.
If we go to the lowest timeframe, there will be a pattern similar to the smallest part of the whole wave as a fractal.
3 Main Rules of Elliott’s Wave Theory
In applying Elliot wave predictions the most important thing is how to determine the wave pattern, or how to determine points 1,2,3,4,5 and points a, b, c.
It takes experience indeed to be able to determine the right point for each wave.
The following are 3 rules for determining Elliot waves, you must obey this rule.
- Wave 3 is not the shortest impulse wave, this must be considered.
- #Wave 2 does not go beyond the beginning of Wave 1.
- Wave 4 does not exceed the end of Wave 1.
According to Elliot, the main rules above absolutely must be obeyed.
This is important in Elliott wave theory predictions.
If there are five impulsive waves that do not comply with these rules, then another starting point must be found to start identification again from the beginning.
In addition, there are some additional rules that are not absolutely required to be met:
- sometimes the 5th wavelength does not exceed the 3rd wave.
- 3rd wave is the longest.
- 2nd and 4th waves often move to retrace according to Fibonacci Retracement rules.
How to apply Elliott wave theory predictions
The first thing we will look for is the first wave if you see that the price seems to have reached its lowest point and has started a new step up.
Based on Elliott Wave’s knowledge, you labeled this movement as Wave 1 and retracement as Wave 2.
To find a good entry point, we use three main rules and guidelines that you can apply, here we find.
- Rule Number 2: Wave 2 never go beyond the beginning of Wave 1
- Waves 2 and 4 often retrace from the Fibonacci retracement level rules
Next, we use the Fibonacci tool to see if the price is at the Fib level.
And it turns out the price is at the level of 50%, and this could be the start of Wave 3, which is a very strong buy signal.
And don’t forget to place stop loss as an anticipation step at the 100% Fibonacci level.
We see what happens next.
After waiting for some time finally you see the price rises and buy positions that you have ordered to give a sweet profit.
Example trade to another scenario
You find the correction pattern of the Elliott wave, as shown in the picture below is a flat correction.
As we understand after the impulse wave ends, a correction wave will emerge, and it forms the patterns a, b, c.
Since the flat correction wave is detected, it is likely that from the example above the price will fall and form a new impulse wave.
The scenario is that you place a sell order by placing a stop loss above wave 4, this if this pattern fails, it becomes part of trading risk management.
Next what happens is that the price actually goes down and your sell order positions give a sweet profit.
It might seem very easy, but you need skill in determining impulse wave correctly
It seems that using Elliott wave theory predictions is very interesting, but to be able to master it well, he needs more experience and experimentation.
Especially traders must obey three main rules in determining impulse waves.
And more importantly, this method can apply for forex, crypto, and or stock trading.
If you are not sure of your ability, take advantage of the broker’s demo account facility to learn and practice Elliott wave predictions with risk-free.