What actually is Elliot Wave Theory?
Elliott Wave Theory is a technical analysis approach used in financial markets to predict future price movements. It is based on the premise that markets move in predictable patterns, and these patterns can be identified and analyzed to make trading decisions.
The theory is based on the idea that markets move in a series of waves, with each wave representing a specific market movement. There are two types of waves: impulse waves and corrective waves. Impulse waves move in the direction of the overall trend, while corrective waves move against the trend.
Elliott Wave Theory can be used effectively by following these steps:
Identify the trend: The first step is to identify the overall trend of the market. This can be done by analyzing charts and identifying higher highs and higher lows for an uptrend or lower lows and lower highs for a downtrend.
Count waves: Once the trend has been identified, count the waves within that trend. Impulse waves typically have five waves, while corrective waves have three.
Determine wave structure: Once the waves have been counted, determine the structure of the waves. Impulse waves are made up of three waves in the direction of the trend (called "impulse" waves) and two waves against the trend (called "corrective" waves). Corrective waves are made up of three waves, all moving against the trend.
Identify potential reversal points: Once the wave structure has been determined, identify potential reversal points based on where the waves are in the overall pattern. For example, if an impulse wave is in its final stages, a reversal may be imminent.
Place trades: Based on the analysis of the wave patterns, place trades to take advantage of potential price movements.
It's worth noting that Elliot Wave Theory is a subjective approach and requires a great deal of practice and experience to use effectively. Additionally, like all technical analysis approaches, it is not foolproof and can be subject to errors and false signals.
 |
| Elliott Wave Theory based Technical Analysis |
Like any trading approach, Elliot Wave Theory has its pros and cons. Here are some of the most significant advantages and disadvantages of this technical analysis approach:
Pros and Cons of Elliot Wave Theory
Pros
Predictive power: Elliot Wave Theory can help traders predict future price movements by identifying and analyzing patterns in the markets.
Comprehensive: Elliot Wave Theory considers all timeframes and asset classes, making it a comprehensive approach to trading.
Objective rules: Elliot Wave Theory has objective rules for identifying waves and wave patterns, which can provide structure and consistency to a trader's analysis.
Potential high returns: If used correctly, Elliot Wave Theory can provide traders with high returns.
Cons
Subjective: Elliot Wave Theory can be subjective, with different traders interpreting the same market movements in different ways.
Steep learning curve: Elliot Wave Theory can be difficult to learn, as it requires a great deal of practice and experience to use effectively.
False signals: Like any technical analysis approach, Elliot Wave Theory can provide false signals, which can lead to losses if traders act on those signals.
Time-consuming: Analyzing wave patterns using Elliot Wave Theory can be time-consuming, as it requires detailed analysis of charts and multiple timeframes.
Overall, Elliot Wave Theory can be a powerful tool for traders, but it requires experience and discipline to use effectively. Traders should also use this approach in combination with other technical and fundamental analysis tools to make informed trading decisions.
Alternative Technical Analysis Theories and Scenarios
There are several alternative technical analysis theories and approaches to Elliot Wave Theory, including:
Dow Theory: Developed by Charles Dow, this theory focuses on the analysis of market trends and uses price movements to predict future trends.
Fibonacci Retracement: This theory is based on the idea that markets move in a series of retracements, which can be predicted using the Fibonacci sequence.
Moving Averages: This theory uses moving averages to identify trends and potential reversal points in the markets.
Relative Strength Index (RSI): This theory uses RSI to identify overbought and oversold conditions in the markets, which can signal potential trend reversals.
Japanese Candlestick Analysis: This theory uses candlestick charts to analyze price movements and identify potential trends and reversal points.
Bollinger Bands: This theory uses Bollinger Bands to identify potential trend reversals based on deviations from the moving average.
Price Action Trading: This approach focuses on analyzing the price movements and patterns in the markets to predict future trends and identify potential trading opportunities.
Each of these theories and approaches has its strengths and weaknesses, and traders often use a combination of several approaches to make informed trading decisions. It's important to note that no single approach or theory can guarantee success in trading, and traders should always use risk management strategies to protect their capital.
MQ4 Code Sample
// Define the variables
double trend;
int wave;
double waveStructure[100];
double waveEnd;
// Define the start function
int start()
{
// Analyze the charts to determine the trend
trend = iMA(NULL, 0, 50, 0, MODE_EMA, PRICE_CLOSE, 0) - iMA(NULL, 0, 200, 0, MODE_EMA, PRICE_CLOSE, 0);
// Count the waves within the trend
for(int i=0; i<100; i++)
{
if(i == 0)
{
waveStructure[i] = 1;
}
else if(trend > 0)
{
if(i % 2 == 0)
{
waveStructure[i] = -1;
}
else
{
waveStructure[i] = 1;
}
}
else if(trend < 0)
{
if(i % 2 == 0)
{
waveStructure[i] = 1;
}
else
{
waveStructure[i] = -1;
}
}
}
// Determine the end of the fifth impulse wave in an uptrend or the end of the third corrective wave in a downtrend
for(int i=0; i<100; i++)
{
if(trend > 0 && waveStructure[i] == 1 && waveStructure[i+1] == -1 && waveStructure[i+2] == 1 && waveStructure[i+3] == -1 && waveStructure[i+4] == 1)
{
waveEnd = i+4;
break;
}
else if(trend < 0 && waveStructure[i] == -1 && waveStructure[i+1] == 1 && waveStructure[i+2] == -1)
{
waveEnd = i+2;
break;
}
}
// Confirm the trend reversal using other technical indicators or price action signals
if(waveEnd > 0 && Close[0] < Low[waveEnd])
{
// Place a sell trade
OrderSend(Symbol(), OP_SELL, 0.01, Bid, 3, StopLoss, TakeProfit, "Elliot Wave Sell", 0, 0, Red);
}
else if(waveEnd > 0 && Close[0] > High[waveEnd])
{
// Place a buy trade
OrderSend(Symbol(), OP_BUY, 0.01, Ask, 3, StopLoss, TakeProfit, "Elliot Wave Buy", 0, 0, Green);
}
// Return value
return(0);
}
There are several variations of the Elliot Wave Theory, some of which are:
Classic Elliot Wave Theory: This is the original form of the theory, which identifies 8 waves within a complete cycle. This includes five impulse waves (1, 2, 3, 4, 5) in the direction of the trend and three corrective waves (A, B, C) against the trend.
Neo-Classical Elliot Wave Theory: This variation of the theory focuses more on the internal structure of each wave, rather than the complete cycle. Neo-classical theory identifies five-wave impulse moves and three-wave corrective moves.
Modified Elliot Wave Theory: This variation uses Fibonacci retracement levels to identify potential reversal points in the market. It also includes a set of guidelines to help traders identify valid wave structures.
Objective Elliot Wave Theory: This variation uses computer algorithms and mathematical formulas to identify wave structures and predict market trends. This variation is also known as the "Elliott Wave DNA" approach.
Harmonic Elliot Wave Theory: This variation combines the principles of Elliot Wave Theory with harmonic patterns. It uses Fibonacci ratios to identify potential turning points and reversal zones in the market.
Each variation has its unique approach and interpretation of the Elliot Wave Theory. Traders should choose the variation that aligns with their trading style and objectives.
Comments
Post a Comment